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Advance Ruling Case No. 46

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.
(b) The Company is a subsidiary of Company A, which was incorporated in Country X.
(c) Company B, which is also a subsidiary of Company A and was incorporated in Country X, is a contractor supplying specialized workers to perform services at customers' designated operational sites outside Hong Kong ("the Sites").
(d) The Company was set up to act as a subcontractor of Company B.


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3. The arrangement 

(a) Company B has entered into a number of service contracts with its customers ("Master Contracts").
(b) Under the arrangement, Company B has entered into subcontracting agreements with the Company to subcontract part of the services under the Master Contracts to the Company. The Company is responsible for supplying trained and skilled workers to perform the required services at the Sites.
(c) In return, the Company receives service income from Company B for the subcontracting services provided, which is calculated based on a certain percentage of the day rate of workers charged by Company B to its customers.
(d) The Company will employ senior managers outside Hong Kong who will be responsible for the supervision work at the Sites. The Company does not and will not maintain any staff in Hong Kong nor perform any work in Hong Kong.
(e) A related company, Company C has entered into a service agreement with the Company for the provision of skilled workers to perform services at the Sites on behalf of the Company. Company C was incorporated in Hong Kong and based in Country Y. It does not maintain any staff in Hong Kong.
(f) In return, Company C recharges the related costs to the Company at cost plus a fixed percentage of mark up.
(g) Under the arrangement, the Company only derives income from Company B for the provision of services which are and will be entirely rendered by the Company's and Company C's staff outside of Hong Kong. All staff will not perform any work in Hong Kong and they are tax residents in Country X.
(h) The Company has engaged another overseas related company to perform the necessary administrative functions outside Hong Kong.
(i) The Company negotiated and concluded all the above agreements with its related companies outside Hong Kong.

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4. The ruling

  The service income derived by the Company from the services performed outside Hong Kong is not chargeable to Hong Kong profits tax under section 14 of the IRO.


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5. The period for which the ruling applies

  This ruling will apply to 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 

  30 June 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.)