Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Whether a business is carried on in Hong Kong?

The question applies also to a trade or a profession likewise.

Once we have established that there is a business, the next question is: Is it carried on in Hong Kong? If no, then no profits tax is payable, unless the income is deemed to be chargeable under Section 15 of Inland Revenue Ordinance.  

Whether carrying on a business in Hong Kong is largely a question of facts. In practice, the Inland Revenue Department considers the following facts:  

(1)   Incorporation of a company in Hong Kong. If a limited company is set up in Hong Kong, the IRD will generally challenge that the company is carrying on a business in Hong Kong unless the company can adduce substantial evidence to prove otherwise.

(2)  A branch, an office, a workshop, a shop or a sales outlet is set up in Hong Kong. Apparently the aforesaid constitute a fixed place of business in Hong Kong. If only a purchase office or a warehouse for storage on goods in transit is set up in Hong Kong, the IRD will generally accept it as no business carried on in Hong Kong.  

(3)  The company has a central management and control in Hong Kong. In Lam Soon Trademark case, a company incorporated outside Hong Kong is held to be carrying on business in Hong Kong if the company is managed and control in Hong Kong. Besides, according to the definition of permanent establishment under Inland Revenue Rule 5, a permanent establishment in Hong Kong includes a “management” set up in Hong Kong.

(4)  An agent of a non-resident is appointed in Hong Kong to sell goods on behalf of the non-resident and the agent maintains a stock of merchandise from which he regularly fills orders – see IRR 5. In such case, the non-resident is deemed to be carrying on business in Hong Kong.

(5)  An agent of a non-resident who has general authority to negotiate and conclude contracts of sales or purchases on behalf of the non-resident – see IRR 5. In such case, the non-resident is deemed to be carrying on business in Hong Kong.

Trading with Hong Kong should be distinguished from trading in Hong Kong --- vide UK court case Grainger & Son versus Gough 3 T.C. 467. The former (trading with Hong Kong) does not give rise to any profits tax liability; but the latter (trading in Hong Kong) does. 

Setting up a buying office in Hong Kong does not by itself make it chargeable to Profits Tax. For example, foreign supermarkets may send purchasing officers to Hong Kong to buy goods --- generally this is no trading in Hong Kong. But if a permanent establishment is set up in Hong Kong to buy and sell goods, the permanent establishment will be liable to pay profits tax. 

 

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