Advance Ruling Case No. 66

1. The provisions of the Ordinance

This ruling applies in respect of section 50AAC(5) and Schedule 17G of the Inland Revenue Ordinance ("IRO").

2. Background

The Applicant is a limited partnership headquartered in a non-DTA territory and belongs to a group based outside Hong Kong. The group is managed by its Board of Management (“BOM”). The Applicant is the core operational entity of the group.

3. The arrangement

(a)

The Applicant intends to set up a representative office (“RO”) in Hong Kong.

(b)

A member of the BOM responsible for sales function will be seconded to Hong Kong to manage the RO.

(c)

The RO is established for the purposes of:

(i)

providing marketing and sales support services for the Applicant in the Asia Pacific Region (“the Region”), including introducing and promoting goods of the Applicant to customers in the Region, maintaining relationship with the customers, and collecting trade information and developing marketing strategies in the Region for the Applicant;

(ii)

providing a work base for that member of the BOM to perform day-to-day activities for sales during his stay in the Region, including attending to calls with the sales team members, communicating with the sales companies of the group all over the world, and preparing for his visits to the sales companies of the group in the Region;

(iii)

providing assistance to a fellow subsidiary of the group in Hong Kong in identifying new customers and promoting the group’s products in Hong Kong.

(d)

The operations of the RO and the fellow subsidiary are completely independent.

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

There are no assumptions made by the Commissioner.

5. The ruling

(a)

The RO constitutes a permanent establishment of the Applicant in Hong Kong.

(b)

The Applicant is therefore regarded as carrying on a trade or business in Hong Kong.

(c)

Profits or losses should be attributed to the RO as if it were a separate and independent enterprise engaged in the same or similar activities under the same or similar conditions, taking into account the functions performed, assets used and risks assumed by the Applicant through the RO.

6. The period for which the ruling applies

This ruling applies to the Applicant for the years of assessment 2019/20 and 2020/21.

7. Date of ruling issued

5 September 2019

8. Commentary

(a)

Section 50AAC(5) and Part 3 of Schedule 17G of the IRO are relevant to determining whether a non-DTA territory resident person has a permanent establishment in Hong Kong. Section 5 of Schedule 17G provides that even if the non-DTA territory resident person has a fixed place of business in Hong Kong, the person is not regarded as having a permanent establishment in Hong Kong if the overall activity carried on for it through the place is of a preparatory or auxiliary character.

(b)

In the present case, the RO is a fixed place of business of the Applicant in Hong Kong. It would constitute a permanent establishment in Hong Kong unless its activities in relation to the business of the Applicant as a whole are of a preparatory or auxiliary character.

(c)

When determining whether the activities carried on for the Applicant through the RO are of a preparatory or auxiliary character, reference should be made to the commentary on Article 5 (Permanent Establishment) of the “OECD Model Tax Convention on Income and on Capital”. Paragraph 71 of that commentary is relevant and is extracted as follows:

“A fixed place of business which has the function of managing an enterprise or even only a part of an enterprise or of a group of the concern cannot be regarded as doing a preparatory or auxiliary activity, for such a managerial activity exceeds this level.”

(d)

The managerial activities carried out by the member of the BOM through the RO cannot be of a preparatory or auxiliary character. Therefore, the RO constitutes a permanent establishment of the Applicant in Hong Kong.

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