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

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What 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 nature.

Do you know what activities will not be regarded by the IRD as a "permanent establishment"? Click 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 brain.  

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 Kong.   

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.       


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