1. the Hong Kong profits tax implications to STPL in respect of its arrangement with STPCL (15 marks)
• Section 14(1) of Inland Revenue Ordinance (IRO) imposes three conditions for profits to be chargeable to Hong Kong profits tax. …show more content…
It appears that TI does not carry on business in Hong Kong and hence it will not be chargeable to profits in respect of the royalty income under Section 14. However, if the royalty was paid by STPL for the use or right to use the trademark in Hong Kong, it will be taxable under Section 15(1)(b). However, if the licence agreement stipulates that royalty payment is for the use or right to use of the trademark in the Mainland only, Section 15(1)(b) does not apply. Even Section 15(1)(b) does not apply, under Section 15(1)(ba), the royalty paid to TI will be chargeable if the trademark is used outside Hong Kong and the royalty is deductible to STPL. This would be the case if the royalty income of STPL is sourced from Hong Kong and taxable, and the royalty expense paid to TI would then be tax deductible.
If TI is chargeable to Profits Tax in respect of the royalty under either Section 15(1)(b) or (ba), pursuant to Section 21A, the assessable profit is 30% of the gross royalty paid. However, if the trademark has been owned previously by any person carrying on a business in Hong Kong, the assessable profits will become 100% of the royalty, as TI and STPL are associated companies. It appears this is not the case. Pursuant to Section 20B, STPL needs to do the relevant tax filing for TI. STPL also needs to withhold and pay the relevant tax for …show more content…
• Assuming that dividends are paid, STP Ltd may need to resort to external bank borrowing for its new investment in Thailand. Interest is allowable only if money is borrowed for producing chargeable profit in Hong Kong (section 16(1)(a) of IRO), it can satisfy any one condition under section 16(2), and the deduction will be subject to the limitation under the secured loan test and interest flow-back test. • Investment in the Thai establishment may not give raise to any chargeable profit in Hong Kong, because dividend income is not taxable and any gain on subsequent disposal of the investment is also not taxable as it is of a capital nature; thus interest on money borrowed to finance the new investment cannot satisfy section 16(1)(a) and interest paid by STP Ltd is not allowable. • Assuming that fund is used to finance the Thai establishment and STP Ltd needs to pay a dividend, borrowing may also be required. It is the long understanding that borrowing for paying dividend is not for producing chargeable profit and thus the interest on money borrowed for dividend payment is not
• Section 14(1) of Inland Revenue Ordinance (IRO) imposes three conditions for profits to be chargeable to Hong Kong profits tax. …show more content…
It appears that TI does not carry on business in Hong Kong and hence it will not be chargeable to profits in respect of the royalty income under Section 14. However, if the royalty was paid by STPL for the use or right to use the trademark in Hong Kong, it will be taxable under Section 15(1)(b). However, if the licence agreement stipulates that royalty payment is for the use or right to use of the trademark in the Mainland only, Section 15(1)(b) does not apply. Even Section 15(1)(b) does not apply, under Section 15(1)(ba), the royalty paid to TI will be chargeable if the trademark is used outside Hong Kong and the royalty is deductible to STPL. This would be the case if the royalty income of STPL is sourced from Hong Kong and taxable, and the royalty expense paid to TI would then be tax deductible.
If TI is chargeable to Profits Tax in respect of the royalty under either Section 15(1)(b) or (ba), pursuant to Section 21A, the assessable profit is 30% of the gross royalty paid. However, if the trademark has been owned previously by any person carrying on a business in Hong Kong, the assessable profits will become 100% of the royalty, as TI and STPL are associated companies. It appears this is not the case. Pursuant to Section 20B, STPL needs to do the relevant tax filing for TI. STPL also needs to withhold and pay the relevant tax for …show more content…
• Assuming that dividends are paid, STP Ltd may need to resort to external bank borrowing for its new investment in Thailand. Interest is allowable only if money is borrowed for producing chargeable profit in Hong Kong (section 16(1)(a) of IRO), it can satisfy any one condition under section 16(2), and the deduction will be subject to the limitation under the secured loan test and interest flow-back test. • Investment in the Thai establishment may not give raise to any chargeable profit in Hong Kong, because dividend income is not taxable and any gain on subsequent disposal of the investment is also not taxable as it is of a capital nature; thus interest on money borrowed to finance the new investment cannot satisfy section 16(1)(a) and interest paid by STP Ltd is not allowable. • Assuming that fund is used to finance the Thai establishment and STP Ltd needs to pay a dividend, borrowing may also be required. It is the long understanding that borrowing for paying dividend is not for producing chargeable profit and thus the interest on money borrowed for dividend payment is not