Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

May 20, 2022
2022-5501

Hong Kong Court rules booked trading profits are not necessarily subject to profits tax

Executive summary

Hong Kong’s Court of First Instance (CFI) recently handed down a favorable decision which clarified that profits tax liabilities are imposed on what a taxpayer has done to earn the profits in question, as opposed to what its role or purpose in Hong Kong is, notwithstanding that its role in Hong Kong is to mitigate the overseas tax liabilities of its group.

Detailed discussion

The taxpayer was a private limited company incorporated in Hong Kong engaged in the trading of electronic products. It purchased the products from two independent Hong Kong suppliers and sold to its group company in the Netherlands. All business operations of the taxpayer were conducted by affiliates outside Hong Kong, while its only connection with Hong Kong was limited to having a bank account in Hong Kong.

The CFI held that the taxpayer’s booked profits are not subject to Hong Kong profits tax, on the basis that: (i) it did not carry on a trade or business in Hong Kong; and (ii) all the commercial operations relevant to the production of the trading profits were performed outside Hong Kong.

The CFI held that a Hong Kong incorporated company with limited activities carried out in Hong Kong, such as operating a bank account from outside Hong Kong and maintaining a registered office in Hong Kong, would not normally be regarded as carrying on a business in Hong Kong. The locality of the Hong Kong suppliers’ business was irrelevant.

In the context of a trading business, the CFI considered that operating a bank account to settle payments due to suppliers and receive payments from customers would not by itself amount to profit-producing activities. They were incidental acts done after the formation of the profit-generating contracts of purchase and sale and would not generally be relevant for determining the source of trading profits. While the tax planning arrangement undertaken by the group prevented a portion of the profits from being charged to tax anywhere, it was not relevant in determining the source of profits.

_________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Services Limited, Hong Kong

Ernst & Young LLP (United States), Hong Kong Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct Opt out of all email from EY Global Limited.

 


Cookie Settings

This site uses cookies to provide you with a personalized browsing experience and allows us to understand more about you. More information on the cookies we use can be found here. By clicking 'Yes, I accept' you agree and consent to our use of cookies. More information on what these cookies are and how we use them, including how you can manage them, is outlined in our Privacy Notice. Please note that your decision to decline the use of cookies is limited to this site only, and not in relation to other EY sites or ey.com. Please refer to the privacy notice/policy on these sites for more information.


Yes, I accept         Find out more