7. Profits Tax 2

7. Profits Tax 2 - BUSI0018 Hong Kong Taxation Tutorial...

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BUSI0018 – Hong Kong Taxation Tutorial Notes on Profits Tax (2) – Trading Profit and Manufacturing profit Three conditions for charging Hong Kong profits tax (IRO s14) 1. the taxpayer must carry on a trade, profession or business in Hong Kong; 2. the trade, profession or business derives profits; and 3. the profits arise in or are derived from Hong Kong. Points to note: a) All the three conditions must be satisfied before a charge on tax can arise! b) Thus, even if a person who carries on a business in Hong Kong but derives profits from another place is not required to pay profits tax in Hong Kong . c) The IRD looks at the locality of profits rather than the residence of the taxpayer. Case: CIR v Hang Seng Bank (1990) – profits not taxable in HK The taxpayer had accrued profits from the purchase and resale of certificates of deposit, bonds etc in London and Singapore. The taxpayer carried on all of its business and made all of its investment decisions in Hong Kong . The Board of Review considered that the taxpayer’s activities from which the income had arisen was the buying and selling of the property in the overseas market. The Privy Council upheld the decision that the profits were not liable to profits tax since the purchase and sale contracts were effected outside Hong Kong . Factor to determine whether a business is carried on in Hong Kong If the taxpayer’s central management is located in Hong Kong, even if its other business activities are largely conducted elsewhere It is accepted that the taxpayer carries on business in Hong Kong. The central management and control refers to the highest level of control of the business of a company and the exercise of which does not necessarily require any active involvement. The place where the central management and control actually abides is usually the place where the directors meet to do the business of the company . The place where those main operations take place is not necessarily the place of central management and control is exercised. The place of board meetings is also not necessarily the place where the central management and control is located. For non-resident companies , we can also look at whether a “permanent 1
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establishment” exists. According to Inland Revenue Rule 5, a “permanent establishment” is defined as a branch, management or a place of business but excludes an agent, unless the agent has and habitually exercises a general authority to negotiate and conclude contracts on behalf of his principal; or the agent has a stock of merchandise from which he regularly fills orders on behalf of his principal. Carrying on business through an agent – also regarded as carrying business in HK A taxpayer is regarded as carrying on a trade, business or profession in Hong Kong if the business activities are conducted through an agent in HK. However, we need to test whether there is really a principal-agent relationship
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7. Profits Tax 2 - BUSI0018 Hong Kong Taxation Tutorial...

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