Advance Ruling Case No. 26

1. The provisions of the Ordinance

This ruling applies in respect of Section 14 of the Inland Revenue Ordinance ("IRO").

2. Background

(a)

The Company was incorporated in Hong Kong during 2005/2006. Its directors are non-Hong Kong residents. The Company is a wholly owned subsidiary of H Ltd. which carries on business in Country A.

(b)

The Company is a member of X Group whose main business is production and trading of chemical products. The Group has production sites in various countries and its worldwide sales functions are performed in Country B.

(c)

The Group has started sourcing Chemical S from Country C. The Company's director has a well-established network in sourcing Chemical S in Country C.

3. The arrangement

(a)

The Company was designated as X Group's sourcing and sales representative of Chemical S.

(b)

The Company and H Ltd. has entered into an agreement whereby the purchase and sale of Chemical S to territories excluding Hong Kong will be handled by H Ltd. The Company will receive commission from H Ltd. for enabling H Ltd. to derive trading profits in utilizing the director's well-established network in Country C.

(c)

The Company does not maintain any office, employ any staff, appoint any agent nor operate any bank account in Hong Kong.

4. The ruling

(a)

The Company does not carry on business in Hong Kong; and

(b)

The commission received by the Company from H Ltd. pursuant to the commission agreement are not chargeable to Hong Kong profits tax under Section 14 of the IRO.

5. The period for which the ruling applies

This ruling will apply with effect from the year of assessment 2005/2006 and subsequent years of assessment.

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

The Commissioner has assumed that the subject arrangement would be implemented in the way stated in the ruling application and the ruling. No other assumption was made.

7 . Date of ruling issued

7 February 2006.

8. Commentary

Under Section 14 of the IRO, every person who carries on a trade, business or profession in Hong Kong is chargeable to profits tax on the profits arising in or derived from Hong Kong. In the present case, the Company has no business carried on in Hong Kong and it does nothing in Hong Kong to earn the commission in question, therefore Section 14 does not apply.

(This commentary is not a legally binding statement and it does not form part of the Ruling.)