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Hong Kong Inland Revenue Department advance ruling: no tax on profits from overseas branch of Hong Kong distribution company

The Hong Kong Inland Revenue Department (IRD) issued an advance ruling (Case No. 34) on 10 August 2007 stating that profits derived from an overseas branch of a Hong Kong distribution company are not chargeable to profits tax in Hong Kong. The ruling applies from the year of assessment 2007/2008 onwards. The details of the arrangement are summarized below.

The company incorporated in Hong Kong is primarily engaged in the distribution of products of a group of companies in Hong Kong and Asia, which are manufactured by the overseas factories of the group. The company intends to set up a branch in Country X in South East Asia.

The branch will purchase products directly from the group's factories at arm's length prices and sell the products to distributors/customers in South East Asian countries at agreed prices. All contracts relating to purchases and sales will be negotiated, concluded and executed by the branch, and all the deals will be settled outside Hong Kong. The company in Hong Kong will neither be involved in negotiating or concluding purchases and sales, nor in taking and endorsing purchase orders.

A bonded warehouse will be set up in Country X to facilitate storage of the products. The products will be stored in the warehouse or shipped directly to the other countries in South East Asia depending on the needs of the distributors/customers. The branch will open bank accounts in Country X, and all payments, receipts and other finance arrangements will be handled by the branch through the bank accounts in Country X.

The parent company in Hong Kong will provide IT, finance, accounting, research and other administrative support to the branch. The costs and expenses incurred by the company in Hong Kong in providing such services will be allocated to the branch for statutory reporting in Country X.

Based on the proposed arrangement, the IRD has ruled that profits arising from the branch are sourced outside Hong Kong and will not be charged to profits tax in Hong Kong.

Hong Kong Inland Revenue Department advance ruling: no tax on profits from trading of spare parts manufactured overseas and warehoused in Hong Kong

The Hong Kong Inland Revenue Department (IRD) issued an advance ruling on 30 August 2007 that a company will not be charged to profits tax in Hong Kong in respect of profits from the trading of spare parts manufactured overseas and warehoused in Hong Kong. The ruling will apply from the year of assessment during which the stockpile is created, which is expected to be 2007/2008. The details of the proposed arrangement are summarized below.

The company incorporated and based outside Hong Kong is engaged in the manufacture and sale of printing machinery and spare parts for such machinery. The company manufactures spare parts outside Hong Kong, and also purchases spare parts from suppliers outside Hong Kong. The spare parts are sold to its global subsidiaries which act as distributors in their local markets.

The company proposes to locate its stock of spare parts in Hong Kong on the premises of an independent warehouse manager to facilitate distribution to subsidiaries in the Asia Pacific region. The warehouse manager will not display or provide information regarding the stock, communicate with customers of the company, nor be involved in any negotiation or conclusion of purchase or sale orders on behalf of the company. The warehouse manager will merely store the products safely and pack the products for shipment upon instructions from the company.

The company will negotiate directly with third party carriers for delivery of the spare parts from the Hong Kong stockpile to the customers. It will not maintain any office, employ any staff nor appoint any agent in Hong Kong in regard to the purchase and sale of the spare parts. All purchases and sales will be negotiated and concluded by the company outside Hong Kong, and all paperwork and banking activities relating to the purchases and sales will be handled outside Hong Kong.

Based on the proposed arrangement, the IRD has ruled that the company will not be chargeable to profits tax in Hong Kong in respect of the profits derived from the trading of such spare parts located in Hong Kong.

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