In this blog we will explore the profits obtained by taxpayers in Hong Kong and source of these profits from bill of exchange or certificate of deposits. Then we will have discussion on the topic of excluded income and capital receipts. In case of excluded income, we will discuss the setting free of profits of mutual fund and unit trust from tax. While in case of Capital receipts we will discuss what is fixed asset? And what are temporary and permanent losses of fixed asset.
Profits from Bills of Exchange or Certificates of Deposits (CDs)
The word ‘Certificate of deposit’ is clearly defined in Section 2 (1) of Hong Kong tax law, the meaning of this word is that, a document that is related to the money, in any type of currency, that has been accumulated with its issuer or some other person, being as a document acknowledges a duty to pay a said amount to order or to bearer, without or with interest, and being as a paper that is to be delivered without or with funding, without or with interest the right to get the said amount is able to be transferred and in occurrence of any such document that is advised as instrument as described in the definition of ‘prescribed instrument’ in accordance with the Section 137 B of Banking Ordinance. That Ordinance incurs any interest or right referred to in the para b of that explanation in respect of such paper.
A certificate of deposit may be a paper or document issued by the financial institution or bank for the purpose of certifying a deposit that is made by a person having establish company in Hong Kong, the date of payment or the interest rate. Upon his/her adult hood the depositor is allowed to get his/her accumulated interest and the rate of interest back. Other than that, a certificate of deposit may be provided at a discounted amount and repaid to the applicant upon his/her adult hood at the full face value. It is up to the depositor that he/she may sell the certificate of deposit before adult hood, at a price that mirrors the accrued interest value.
Individual Source of Profit from Bills of Exchange or Certificate of Deposit
The profits obtained from bills of exchange or certificate of deposits are allowed to tax in case of corporation either as a start up business Hong Kong or other type of corporation if:
The profits are allowed to tax for a person except corporation either as a start up business Hong Kong or other type of corporation if:
In the judgement of the case of Hang Seng Bank it was stated that, the source of profits should be locating where the contracts are accomplished. These source of profits are profits from presentment or sale on adult hood of certificate of deposits or bills of exchange.
The profits tax is not allowed on the income discussed below:
If expenses are paid by a person to the taxpayer rendering Hong Kong company incorporation service then it is not considered as profit already charged to tax. Due to this reason, the exemption on the sum received in such way could not be claimed by the taxpayer. The reference for this statement is taken from the proceeding of case D 44/04.
Exclusion of Profits of Mutual Fund, Unit Trust in accordance with the Section 26A (1A) of Hong Kong tax law
Sums including profits or gains being raised from the sale of interest or securities, accumulated to or received by:
The details of exemption are given in the departmental interpretation and practice notes 20 (revised June 1998). According to the Section 26 A (1A) (b), a particular investment scheme is the scheme of investment that is approved by the Futures Commissions and Securities or the supervisory authority within the arrangements of acceptable regulatory.
Receipts from the disposal, sale, fixed asset’s destruction or loss are capital in the nature. These receipts are also not allowed to profits tax. The basic nature of capital receipts is a main question of fact. This question in reality is determined from the scenarios of each specific case. There is no some definite rule. In common, this is a matter of degree. None of definition of fixed assets or capital receipt is laid down by the inland revenue ordinance. In case of large body of case law, references must be made.
Definition of Fixed Asset
It has been stated that, a fixed asset is used by a person either having Hong Kong company incorporation service or other businesses for the production of profits by keeping it, and current asset is used for the production of profit by separation from it.
Loss of Fixed Asset as Temporary or Permanent
Capital receipts are considered to be the receipts for a fixed loss of a permanent asset. In the case of Glenboig Union Fireclay Co Ltd.it was observed that, a railway was to be constructed over fireclay mines. These mines were operated by the taxpayer. As a result of construction of this railway the mines could no longer be operated. Because the loss in the form of non-operational mines was permanent the compensation that was paid to the taxpayer was held to be principal in nature. This was so however; the computation of compensation was based on the profits lost due to the destruction.
In case of the Aviation Fuel Supply Company, in December 1995 the airport authority entered into:
The Aviation fuel supply company, under the agreement of franchising should be entitled to:
In following to the agreement of franchise, the facility was designed, financed, constructed and commissioned by the Aviation fuel supply company. The facility was finished and ready to being operated on the occasion of opening of new airport on 6 July 1998. It was notified to Aviation fuel supply company by the Authority in October 2002, about its election following to the facility of cost and making of accelerated payment on 7 July 2003 (‘The date of accelerated payment’). The total accelerated payment made to Aviation fuel supply company by Authority consisted of US $ 449, 043, 000 (‘the sum’). This sum demonstrated the net present value of the anticipated facility payments for the remnant lease term that Aviation fuel supply company would have received otherwise. Following to the agreement of Franchise, the ease was ended on the date of accelerated payment. The agreement of operation survived, despite the payment of accelerated payment to the Aviation fuel supply company by the authority.
The operator would afterwards pay the payments of facility to the authority instead of Aviation fuel supply company.