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Profits Tax - Management fee

First, please click here to read tax guide: excessive remuneration. In fact, these two topics are related. 

Management fee paid to a building management company for managing the premises used by the taxpayer for production of assessable profits is deductible. This is seldom a tax problem. 

What is at issue on this topic is the management fee paid to a closely-connected “service company” for managing an unincorporated business. This is because such payments are often used to avoid tax. See the following example. 

An unincorporated business ABC & Co. made a $2,000,000 profits. To reduce the assessable profits, the business owners set up another unincorporated business XYZ & Co. to manage its business. Then, ABC paid $1,500,000 management fee to XYZ, thus reducing ABC's assessable profits to $500,000. Then, XYZ paid the business owners and their relatives remuneration  and provided them free accommodation and a lot of non-cash benefits. With the personal allowances, graduated tax rates, non-taxable benefits... etc. under Salaries Tax, their total tax liabilities were dramatically reduced. 

If the tax benefit is considerable, the Revenue will argue that the management fee is too excessive to justify a deduction because it is not incurred for the production of assessable profits, but for the avoidance of tax. In such case, the Revenue may invoke anti-avoidance law to counteract the tax benefits. 

 

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