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Advance Ruling Case No. 53

1. The provisions of the Ordinance

  This ruling applies in respect of sections 14 and 15(1)(f) of the Inland Revenue Ordinance ("IRO").

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2. Background

The Company is a member of a Group which is engaged in various businesses in Hong Kong and overseas.
The Company was incorporated in Hong Kong. It is engaged in the business of investment holding and has surplus funds sourced from its overseas investment.
Company S is a company incorporated in Country Y and is a fellow subsidiary of the Company.  It acts as an investment holding company and is engaged in management of overseas subsidiaries.
Company S desires to obtain surplus funds from the Group companies in order to finance the business expansion plan outside Hong Kong.


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3. The arrangement 

The Company will place its surplus funds with Company S under an interest bearing loan agreement.  The Company will receive an arm’s length interest income from Company S.
The Company will remit the funds by direct wire transfer through its bank account in Hong Kong to Company S's bank account in Country Y. Company S does not maintain any bank account in Hong Kong. The funds will not pass through a bank within Hong Kong before being transferred to Country Y.

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

The subject arrangement would be implemented in the way stated in the ruling application and the ruling.
The arrangement does not form a transaction or scheme, or a part thereof, contrived to avoid or evade any fiscal liabilities whether in Hong Kong or other tax jurisdictions.

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5. The ruling

  The interest income to be derived by the Company from Company S in respect of the intercompany loan will not be subject to Hong Kong Profits Tax under sections 14 and 15(1)(f) of the IRO.

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6. The period for which the ruling applies

  This ruling will apply for the year of assessment 2013/14 and subsequent years of assessment.

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7 . Date of ruling issued 

  5 August 2013.

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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 from such trade, profession or business.

Section 15(1)(f) of the IRO deems sums received by or accrued to a corporation carrying on a trade, profession or business in Hong Kong by way of interest derived from Hong Kong to be chargeable receipts.

Interest income is chargeable under Profits Tax either under section 14 or 15(1)(f) of the IRO.  For the interest income earned by persons other than financial institutions, only interest arising in or derived from Hong Kong is liable to profits tax.

For the purpose of determining the place where interest arises or is derived from, it is the location of the originating cause that normally determines the source. Basically, the place of derivation of interest is the place where the credit was provided to the borrower, i.e., the place where the funds from which the interest is derived were provided to the borrower, commonly known as the "provision of credit" test. This test, however, is not applicable where the loans are not simple loans of money. In the case of a money lending business, the Department will apply the operation test in determining the source of the interest income.

In the present case, the Company is not carrying on a money lending business but just receives interest income by placing its surplus funds with Company S which is incorporated and carries on business outside Hong Kong.  The "provision of credit" test will apply in determining the source of the interest income. Since the credit is provided to Company S outside Hong Kong, the interest income does not arise in Hong Kong and thus is not chargeable to Hong Kong Profits Tax.

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