[Flying bird]

This is the real situation our company is facing right now, I am very much appreciate if any one (especially who familiar with Hong Kong tax law) could help to answer;

Background information:
1. Company P with registered place of business in Australia buys products from HK suppliers and sells to the overseas customers via its overseas distributors and agents;
2. Company P is proposing to set up an subsidiary office company S and equipped with staff in Hong Kong and transferring its trading activities (the buying and selling of products) to this office;
3. Company S will derive trading profits, royalty income (from the use of company P's trademark by overseas licenses) and interest income (i.e. from bank deposits in Australia or receivables from Australia);
4. The actual role of company S is not yet to be confirmed by management, but it is proposed that;
(A) Sales to overseas distributors will be performed by company S and company P in Australia will do the invoicing;
(B) Sales to overseas distributors will be performed by a commission based sales agent based overseas. Company S will only be involved in the buying of products.

Questions:
1. The relevant Hong Kong profits tax issues that should be considered in respect of the proposed trading company in Hong Kong; and
2. Tax treatments on the trading profits, royalty and interest income that company S will derive based on the scenario above; and
3. If there are any double taxation treaty currently available between Hong Kong and Australia and whether tax credits and/or deductions will be available in Hong Kong on taxes paid on Australia.

[babu]

Hong Kong tax authorities do not recognize Group accounts. Each company or entity is taxed independently. The question of setting off tax paid in one jurisdiction being set off in another does not arise as you are talking of two different entities.
However it is best you consult a local Tax consultant.

[Flying bird]

Thank you Babu, I am very much appreciating your responses.

Refer to point 3. we are actually worries about if the royalties income received by company S is subjected to HK tax, while transferring back the income (as management fee) back to the Australia company P will also be subjected to Australia tax. In this circumstance, if there are any concessions rule in HK so that is available to setoff that portion of tax paid in Australia. Please if anyone can answer by quoting with the relevant inland revenue ordinance section? Thank you.

[PDLM]

Australia doesn't seem to be on the list of places with a double taxation relief agreement with HK ( http://www.ird.gov.hk/eng/tax/dta_country.htm )

This pamphlet may be useful on the Location of Profits: http://www.ird.gov.hk/eng/pdf/e_dipn21.pdf

[babu]

your point #3:
I suggest you consult a HK tax lawyer/auditor.
However the tax department looks very carefully at any payments made to inter group companies.They may disallow the expense or feel it is too high. Therefore it is best to have an agreement drafted by HK Tax expert to meet the local laws.

[hello_there]

Originally Posted by babu

your point #3:
I suggest you consult a HK tax lawyer/auditor.
However the tax department looks very carefully at any payments made to inter group companies.They may disallow the expense or feel it is too high. Therefore it is best to have an agreement drafted by HK Tax expert to meet the local laws.

Agreed. I am fairly familiar with HK company taxation laws and I don't know the answer to all your questions off the top of my head. Consulting a tax law specialist who has time to consider your particular business model will help you structure arrangements between the two companies to minimize tax impact on profits and will keep you out of trouble and help you avoid tax penalties.

[athena]

4. The actual role of company S is not yet to be confirmed by management, but it is proposed that;
(A) Sales to overseas distributors will be performed by company S and company P in Australia will do the invoicing;

--- Company S will most likely be taxed as it will deemed to have sourced the profits in HK - the key activities such as purchase, sales (e.g. electronically), shipping etc. are done in HK, principle of totality of facts will be used. Would be difficult to argue otherwise -e.g. sales & marketing activities physically carried out overseas are so extensive that source of profits can be considered offshore.

(refer to: http://www.ird.gov.hk/eng/paf/bus_pft_tsp.htm#07
and tax rule interpretation per DIPN 21)

(B) Sales to overseas distributors will be performed by a commission based sales agent based overseas. Company S will only be involved in the buying of products.

--- Company S, given that activity is limited as buying office, and does not receive service income from Company P, will have no taxable trading profits.

Originally Posted by Flying bird

This is the real situation our company is facing right now, I am very much appreciate if any one (especially who familiar with Hong Kong tax law) could help to answer;

Background information:
1. Company P with registered place of business in Australia buys products from HK suppliers and sells to the overseas customers via its overseas distributors and agents;
2. Company P is proposing to set up an subsidiary office company S and equipped with staff in Hong Kong and transferring its trading activities (the buying and selling of products) to this office;
3. Company S will derive trading profits, royalty income (from the use of company P's trademark by overseas licenses) and interest income (i.e. from bank deposits in Australia or receivables from Australia);
4. The actual role of company S is not yet to be confirmed by management, but it is proposed that;
(A) Sales to overseas distributors will be performed by company S and company P in Australia will do the invoicing;
(B) Sales to overseas distributors will be performed by a commission based sales agent based overseas. Company S will only be involved in the buying of products.

Questions:
1. The relevant Hong Kong profits tax issues that should be considered in respect of the proposed trading company in Hong Kong; and
2. Tax treatments on the trading profits, royalty and interest income that company S will derive based on the scenario above; and
3. If there are any double taxation treaty currently available between Hong Kong and Australia and whether tax credits and/or deductions will be available in Hong Kong on taxes paid on Australia.