Court held that sub-licensing income for the exploitation of trademarks registered overseas to be taxable onshore income

This case indicates that to attribute the activities of an agent performed outside of Hong Kong to a taxpayer in Hong Kong for determining the source of the profits of the latter, the activities performed would have to be regarded as the profit-producing operations of the taxpayer in Hong Kong in the first place. 

The case also lends support to the position adopted by the Inland Revenue Department in its Departmental Interpretation and Practice Notes No. 22 (Revised) in relation to the source rules for sub-licensing income, i.e., the source of such income would generally be determined by the place where the taxpayer obtained the rights and granted the sub-licensing rights (apparently based on the decision held in CIR v TVB-Intentional). An apportionment of the source of such income would apparently not be allowed.

Where such royalties received by a Hong Kong resident are regarded as sourced in Hong Kong as in this case and also regarded as sourced in the place overseas where the rights are used, the overseas tax paid would be creditable in Hong Kong if there is a tax treaty between Hong Kong and the overseas jurisdiction concerned. Otherwise, the overseas tax paid may be deductible in Hong Kong under section 16(1)(ca) of the Inland Revenue Ordinance. 

Many of the issues involved in this case are complicated and clients should seek professional tax advice, where necessary.