Tax Efficiency Profits of Hong Kong Trading firms – Contracts Effective outside Hong Kong

Contracts for purchase and sale

The factor that determines the locality of profits from trading in goods and commodities is generally the place where the contracts for purchase and sale are effected. "Effected" does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts.
Following the Court of Appeal judgment (Magna Industrial Co. Ltd v CIR) it is now clear that a wider approach is necessary. The proper way is to look at all the relevant operations carried out to earn the profits, not simply the purchase and sale of the goods.

In Magna Industrial Co. Ltd. v CIR, the Court of Appeal noted that:
"Obviously the question where the goods were purchased and sold is important. But there are other questions: For example: How were the goods procured and stored? How were the sales solicited? How were the orders processed? How were the goods shipped? How was the financing arranged? How was payment effected?"

How relevant facts are considered

In considering the relevant facts the nature and quality of the activities matter more than their quantity. It is the cause and effect of such activities on the profits that is the deciding factor.

Irrelevant facts

Facts not directly related to the trading activities are considered irrelevant in determining the locality of profits. For example, renting office premises, recruiting general staff, setting up office, etc.

General practice

  • Where the contracts of purchase and sale are effected in Hong Kong, the profits are taxable here.
  • Where the contracts of purchase and sale are effected outside Hong Kong like Europe , America or Mainland China , the profits are not taxable here.
  • Where either the contract of purchase or the contract of sale is effected in Hong Kong, the initial presumption is that the profits are taxable here. However, other relevant facts will have to be examined to determine the source of profits.
  • Where the sale is made to a Hong Kong customer (including the Hong Kong buying office of an overseas customer), the sale contract will usually be taken as having been effected in Hong Kong.
  • Where the effecting of the purchase and sale contracts does not require traveling outside Hong Kong but is carried out in Hong Kong by use of telephone, or other electronic means including the Internet, the contracts will be considered as having been effected in Hong Kong.
  • Trading profits are regarded as being either wholly taxable or wholly non-taxable here. Apportionment is not appropriate.