Profit Tax on a Ltd

DIPN 21，para 17 laid down some priniciples relevant to determining the location of profits. No universal rule on ascertainment of source of profit. Instead， it dependes on nature of profits and the transactions giving rise to them， and requires an accurate legal analysis of each transaction.

The board guiding principles is that one looks to see what the taxpayer has done to earn the profits and where he has done it(Hang Seng Bank and HK-TVBI). In other words, the proper approach is to ascertain what were the operations which produced the relevant profits and where those operations took place. (Relevant operations are only those that produce the profits, effective clauses for earning profits; not the antecedent or incidental activities.) .....

The test used to determine the location of profit depends on nature of income. In this case, the fee received by A Ltd from clients is categorized as commission income or service fees( from giving general advice, managing and investing customers' funds for them), which is a kind of active income. Accordingly, operation test is usually used to ascertain the location of profit: where the services are rendered ;[Karsten Larssen; Smidth v Greenwood; Whampoa Dock]. Service fee is 100% taxable if the services giving rise to the fee payment are performed in HK ; apportionment on a 50:50 basis is possible if partly in HK and partly outside HK.

Whether the adobe mentioned ' additional remuneration' is subject to HK profit tax is under dispute. Applying the aforementioned principles, the arguments for and against are set out as follows :

Arguments for :

1) The source of income was a HK source derived from the management contract signed between A Ltd and the customers. ( as the entire operation, organization, offices, staff and other facilities of A Ltd were all located in HK, and no other information showing that contacts were signed outside HK, it is assumed that the contracts were signed in HK.)

A Ltd was...