is a permanent establishment?
Permanent establishment is
defined in Inland Revenue Rule 5 as: "a branch, management or other place
of business, but does not include an agency unless the agent has, and
habitually exercises a general authority to negotiate and conclude
contracts on behalf of his principal or has a stock of merchandise from
which he regularly fills orders on his behalf. " In short, a
permanent establishment is a fixed place of business of a permanent
Do you know what activities
will not be regarded by the IRD as a "permanent establishment"?
here for the answer.
Whether a business is carried
on in Hong Kong is largely a question of facts. In general, we look to the
identifiable business operations carried on in Hong Kong, for example
manufacturing, property development, provision of services... etc.
However, if there are only minimal activities or the operations are
carried out in different places including Hong Kong, we should look to
location of the effective control of the business --- that is where is the
In the case San Paulo Brazilian
Railway Co. Ltd. versus Carter 3 T.C. 407, the court decided that the
business was carried on in UK because UK was the place where the directors
exercised their control and direction, even though the railway was
located in Brazil.
In the case Malayan Shipping
Co. Ltd. versus FCT 34 ALTR, this was held: "where the brain which
controls the operations from which the profits arise is in Australia the
business is, at any rate partly, carried on in Australia."
Again, the question is largely
a totality of facts, taking into account such factors as location of
capital, employment of staff, location of activities... etc. --- vide
The Egytian Hotels Ltd. versus Mitchell 6 T.C. 542.
An agent may be regarded as
trading in Hong Kong if he accepts orders and binds his principal
generally. But if he only solicits orders which are passed to the oversea
principal for acceptance, he will not be regarded as trading in Hong
When a person
is carrying on a trade or business in Hong Kong, only his profits
arising in or derived from Hong Kong is chargeable to profits tax. Those
profits not arising in or derived from Hong Kong are not taxable.