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Hong Kong Tax News Flash 

Apr 2014, Issue 3

No simple answer to the source of profits

In a recently published advance ruling case, the Inland Revenue Department (IRD) ruled that although the applicant company effects the sales contracts and processes the purchase orders of goods outside Hong Kong through its overseas branch, its profits have a Hong Kong source and are therefore taxable in Hong Kong. Based on the limited information disclosed in the ruling, it is difficult to precisely understand the rationale behind the IRD’s ruling. Perhaps as revealed in the IRD’s commentary in the ruling, it is because the IRD considered the main purpose of interposing the Hong Kong company between the unrelated customers and related overseas manufacturers is to enable the group to obtain trade finance at a lower cost in Hong Kong. More importantly, the publication of this case may signal the IRD’s intention to alert taxpayers on its stance on determining the source of profits in arrangements similar to that described in the ruling. Taxpayers with such similar arrangement should review their existing structure/operations and assess if any change is necessary to minimise the Hong Kong profits tax exposure while managing their overseas tax exposure.

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Reynold Hung
China South and Hong Kong Tax Leader
Hong Kong
Tel: +[852] 2289 3604 Email
Oscar Lau
Hong Kong
Tel: +[852] 2289 5603 Email