Advance Ruling Case No. 14

1. The provisions of the Ordinance

This ruling applies in respect of section 20(2) of the Inland Revenue Ordinance ("IRO").

2. Background

(a)

S Ltd was incorporated in Hong Kong in July 2003. Its business activity is the provision of sourcing and liaison services. Its profits will be subject to Hong Kong Profits Tax.

(b)

It is a wholly-owned subsidiary of S Ltd(UK) which was incorporated in the U.K.

(c)

S Ltd(UK) is principally engaged in catalogue retailing business of garments and general merchandise in the U.K.

(d)

With the objective to source suppliers in the South East Asia and to secure better after-purchase liaison and coordination with the suppliers, S Ltd(UK) intends to appoint S Ltd as its supporting arm in Hong Kong.

3. The arrangement

(a)

S Ltd(UK) will enter into an agreement with S Ltd.

(b)

S Ltd will employ approximately 20 employees in Hong Kong for the provision of the following services: -

(i)

follow-up on the request and delivery of goods with the non-Hong Kong suppliers;

(ii)

liaison on the shipment of goods;

(iii)

liaison on any issues with the suppliers subsequent to the conclusion of purchase contracts already effected by S Ltd(UK) outside Hong Kong;

(iv)

supporting quality assurance standards and inspection of goods;

(v)

sourcing of suppliers, both within Hong Kong/China and South East Asia.

(c)

In return for the services performed, S Ltd will receive from S Ltd(UK) a fee calculated at a 5% mark-up on the actual cost incurred.

(d)

Under the agreement, S Ltd will not be given any authority to negotiate or conclude any contracts on behalf of S Ltd(UK). The following activities will be carried out by S Ltd(UK) outside Hong Kong :-

(i)

negotiation and conclusion of sales and purchase contracts;

(ii)

receiving sales orders or placing purchase orders;

(iii)

maintaining any stock of merchandise.

4. The ruling

Section 20(2) of the IRO will not apply to :-

(a)

deem S Ltd(UK) to be carrying on business in Hong Kong by reason of this business arrangement; and

(b)

deem S Ltd to be the agent of S Ltd(UK), as the fee calculated at 5% mark-up on cost produces not less than ordinary profits to S Ltd.

5. The period for which the ruling applies

The ruling will apply for the years of assessment 2003/04 to 2005/06.

6. Assumptions made by the Commissioner

The Commissioner has assumed that the arrangement would be implemented in the way stated in the ruling application and the ruling.

7. Date of ruling issued

10 October 2003.