Advance Ruling Case No. 44

1. The provisions of the Ordinance

This ruling applies in respect of sections 14 and 20(2) of the Inland Revenue Ordinance ("IRO").

2. Background

(a)

The Company is incorporated in Country X and is a wholly owned subsidiary of Company A. The Company's role is in the manufacturing, marketing, licensing and distribution of computer hardware and software in the Asia Pacific region. The Company does not have any office or employees nor perform any business activities in Hong Kong directly or through an agent.

(b)

Currently the Company maintains a datacenter in Country X ("the Country X Datacenter") providing hosting and storage services in Country X.

(c)

Company B is a company incorporated in Hong Kong and has been a wholly owned subsidiary of Company A.

3. The arrangement

(a)

The Company entered into a service agreement with Company B for the latter to set up a datacenter in Hong Kong ("the HK Datacenter") and provide maintenance, repairing and replacement services for the HK Datacenter.

(b)

The HK Datacenter mainly consists of computer hardware and networking equipment. It is used as a backup site for the primary datacenter in Country X. It is also used for caching of online content.

(c)

Company B is not be involved in any inputting, uploading or maintenance of any software or data stored in the HK Datacenter. All these activities are performed by Company A’s personnel in either Country X or a third country. Company B only provides hardware setup and maintenance services to enable the Company to replicate the applications and data maintained in the Country X Datacenter to the HK Datacenter.

(d)

The setup of the HK Datacenter and the provision of the services to the Company are outsourced to a third party company. Company B's role is to oversee the operation of the HK Datacenter and provide maintenance services to the HK Datacenter where necessary.

(e)

Company B will recruit an employee who will be based in Hong Kong. The employee will work with the third party company to monitor the hardware system maintenance, repair and replace the hardware pertaining to the HK Datacenter.

(f)

The Company pays Company B a service fee equal to all of Company B's costs plus a mark-up of 5% in return. The cost base in calculating the service fee consists of all the expenses incurred by Company B including the depreciation cost of the HK Datacenter. The service income earned by Company B from the Company is fully taxable in Hong Kong.

(g)

Company B does not have and will not be given any authority to negotiate or conclude any purchase or sale contract on behalf of the Company, or negotiate, conclude or execute any contracts with customers of the Company or any other companies within the group. Company B does not carry out any profit earning activity on behalf of the Company in Hong Kong for the account of the Company.

4. The ruling

(a)

The Company will not be subject to tax under section 14 of the IRO by reason of the arrangement.

(b)

Section 20(2) of the IRO will not apply to deem the Company to be carrying on business in Hong Kong by reason of the arrangement.

5. The period for which the ruling applies

The ruling will apply for the year of assessment 2010/11 and subsequent years of assessment.

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

There is no assumption made by the Commissioner.

7 . Date of ruling issued

25 October 2010.