Advance Ruling Case No. 34

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 is incorporated in Hong Kong and is primarily engaged in the distribution of the products ("the Products") of a group of companies ("the Group") in Hong Kong and Asia.

(b)

The Products are manufactured by the factories of the Group outside Hong Kong.

(c)

As part of the business plan of the Group to further expand into the markets in Asia and in particular South East Asia ("SEA"), the Company is contemplating to set up a branch in Country X in South East Asia ("the Branch").

3. The arrangement

(a)

The Branch will initially employ 26 personnel, with 22 in the sales department, 3 in the marketing department, and 1 in accounting.

(b)

The Branch will purchase the Products directly from Group factories at arm's length prices and will sell the Products to distributors/customers in the countries in SEA based on mutually agreed prices. All purchase and sale contracts will be negotiated, concluded and executed by the personnel of the Branch and will be conducted outside Hong Kong. All purchase and sale orders will be received and approved by the Branch in Country X.

(c)

The Company in Hong Kong will not be involved in the negotiation or conclusion of the purchase or sale of the Products. In addition, it will not be involved in receiving or approving the purchase orders from the distributors/customers.

(d)

The management is setting up a bonded warehouse in Country X to provide storage facilities to the Products. The Products may be consolidated first in the warehouse or shipped directly to the other countries in SEA depending on logistic and transportation needs of the distributors/customers in SEA from time to time.

(e)

The Branch will have bank accounts in Country X. All payments to factories and receipts from customers will be handled by the personnel of the Branch through the bank accounts in Country X. All trade finance arrangements such as letters of credit, guarantees, etc will also be handled by the personnel of the Branch through the bank accounts in Country X.

(f)

To achieve economic efficiency, the Company in Hong Kong will provide IT, finance, accounting, research and other administrative support to the Branch. The costs and expenses incurred by the Company in Hong Kong in providing the aforesaid services to the Branch will be allocated by the Company to the Branch for statutory reporting in Country X.

4. The ruling

The Profits to be derived by the Branch are offshore sourced and will not be taxable under Section 14 of the IRO.

5. The period for which the ruling applies

This ruling will apply for the year of assessment 2007/08 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 trade transaction will be implemented in the way stated in the ruling application and the ruling.

7 . Date of ruling issued

10 August 2007.

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 Branch is considered a permanent establishment of the Company in Country X where all the purchase and sales contracts of the Branch will be initiated, negotiated, concluded and executed by the personnel of the Branch. The functions provided by the Company in Hong Kong are considered ancillary in nature. Therefore, section 14 does not apply to the profits to be derived by the Branch.

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