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Advance Ruling Case No. 45

1. The provisions of the Ordinance

  This ruling applies in respect of section 14 of the Inland Revenue Ordinance ("IRO").


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2. Background

(a) The Company was incorporated in Hong Kong. Its directors are non-Hong Kong residents with no place of abode in Hong Kong. All the board of directors' meetings are held outside Hong Kong.
(b) The Company does not maintain any office, employ any staff nor appoint any agent in Hong Kong.
(c) The Company is a member of the A Group of which Company B, a company incorporated in Country X, is its ultimate holding company.
(d) The A Group operates a number of websites ("the Group Websites"). The Group Websites are internet-based venues, through which the content-providers can upload and post information created by them for access by registered individuals of the Group Websites ("the Viewers").
(e) All servers used by the Group Websites are housed in an out-sourced IT facility company in Country Y.
(f) The intellectual property rights of the Group Websites are held by Company C, a member of the A Group incorporated in Country Y.

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3. The arrangement 

(a) The right to operate the Group Websites is conferred on the Company by Company C. The Company is not required to pay licence fees to Company C.
(b) The Company has entered into service agreements with the content-providers ("the Agreement") under which the Company grants the right to the content-providers to upload and post photographs, video content, biographical information, contact information and other textual content created by them ("the Contents") in the Group Websites.
(c) The Contents are made accessible to the Viewers. Under the Agreement, the content-providers are allowed to charge the Viewers a fee for accessing the Contents.
(d) The Agreement is not a document physically entered into between the Company and the content-providers. Instead, the content-providers are required to register online in the Group Websites.
(e) Similar to the content-providers, individuals who are interested in becoming Viewers can register online in the Group Websites and enter into agreements with the Company.
(f) The Group Websites have never been and will not be supplied to any content-providers and / or Viewers in or through Hong Kong.
(g) Whenever the content-providers have charged a fee to the Viewers, the Company is entitled to a certain percentage of such fee as service income in return for providing the Group Websites to the content-providers.
(h) The Company has entered into a service contract with Company B ("the Service Contract"), which was concluded outside Hong Kong, such that the entirety of services that the Company is obliged to provide to the content-providers by virtue of the Agreement is subcontracted to Company B.
(i) The Service Contract is deemed to incorporate the Agreement, thereby rendering Company B to be legally bound by all the terms and conditions established in the Agreement.
(j) Company D, a wholly owned subsidiary of Company B incorporated in Country Z, is responsible for the daily operation of the Group Websites, including IT and web development services, customer and sales support services. The services are performed in Country Z.
(k) All the services, including provision of the Group Websites to the content-providers, processing registrations, design and maintenance of the Group Websites, handling of questions, complaints and notices to the Company etc., required to be provided under the Service Contract are performed by Company B or its group companies outside Hong Kong. No part of the services is provided in Hong Kong.
(l) To ensure that the content-providers would pay the service fee to the Company, the fee charged to the Viewers in accessing the Contents is firstly billed by Company B on behalf of the Company.
(m) The Company is required to pay the entire service fee received from the content-providers as consideration for services rendered by Company B pursuant to the Service Contract. As such, no profits are earned by the Company. Company B would, in effect, deduct the service fee from the amount received from the Viewers before paying the balance to the content-providers directly outside Hong Kong.
(n) The Company has engaged a third party service provider in Hong Kong for company secretarial services and provision of registered office address in Hong Kong.

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4. The ruling

  The Company will not be chargeable to Hong Kong Profits Tax under section 14 of the IRO in respect of the service fee income derived from the arrangement.


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5. The period for which the ruling applies

  This ruling will apply for the year of assessment 2010/11 and subsequent years of assessment up to the termination of the arrangement.


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6. The material assumptions in respect of a future event or any other matter made by the Commissioner

  There is no assumption made by the Commissioner.

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7 . Date of ruling issued 

  4 March 2011.


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8. Commentary 


Under section 14 of the IRO, every person who carries on a trade, profession or business in Hong Kong is chargeable to profits tax on the profits arising in or derived from Hong Kong. For service fee income, the source of profits is the place where the services are performed which give rise to the fees. In the present case, the service fee income to be derived by the Company from the arrangement will not be chargeable to profits tax as all the relevant services are performed outside Hong Kong.

(This commentary is not a legally binding statement and it does not form part of the Ruling.)