The Court of First Instance (CFI) recently handed down a favorable decision which held that booked profits are not subject to Hong Kong profits tax. The decision provides a welcoming clarification 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, including its being set up in Hong Kong to mitigate the overseas tax liabilities of a group.
The CFI further 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.
Neither would what their Hong Kong suppliers do in Hong Kong affect whether a taxpayer is carrying on a business in Hong Kong.
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.
This Hong Kong tax alert discusses the decision and its implications.