Advance Ruling Case No. 19

1. The provisions of the Ordinance

This ruling applies in respect of section 14 of the Inland Revenue Ordinance.

2. Background

(a)

The Company has entered into a contract processing agreement with a China party operating a factory in China ("the China Factory").

(b)

Under the contract processing agreement, the China party provides labour, factory premises, water and electricity facilities for the operation of the China Factory to process goods for the Company in return for processing fees. The Company provides the raw materials, plant and machineries, and training of the workers.

3. The arrangement

(a)

After the China Factory comes into operation, the Company's activities in Hong Kong will be the conclusion of sales, purchase of raw materials to be delivered to the China Factory, and product design.

(b)

The China Factory will be responsible for processing of the goods.

(c)

A number of the Company's employees will visit the China Factory to train the labour and supervise the production. Some would have to work five or six days in the China Factory every week.

4. The ruling

The Company's profits arising from the sale of the goods processed by the China Factory under the contract processing agreement can be apportioned on a 50 : 50 basis for Hong Kong Profits Tax purpose.

5. The period for which the ruling applies

This ruling will apply with effect from the year of assessment 2004/2005, up to the termination of the contract processing agreement.

6. The material assumptions in respect of a future event or any other matter made by the Commissioner

The Commissioner has assumed that the China Factory's name should be X Factory.

7 . Date of ruling issued

1 February 2005.

Additional Note :

The assumption is made specific to the facts of this case as presented to the Department in its application.