In this blog, we will discuss that how a request for a notice of no objection in respect of an application to de-register a company is treated by the authorities of Hong Kong tax department, and in the second half of the blog, we will be discussing the scope of charge on profits tax and the meaning of word ‘trade’.
Deregistration of Private Companies
In respect of an application to deregister a company, request for notice of ‘no objection’ is to be provided.
It is provided by Section 88B of Inland Revenue ordinance that if a request is made by an individual who is liable to apply for deregistration of:
Under Section 750 of the Companies Ordinance, a written notice stating that to the company being deregister that he has no issue or objection if all the conditions given below are satisfied, can be issued by CIR:
Procedure to Make the Request
The below person can make a request:
May submit to the CIR in person or can be by post:
Processing of the Request
For the issuance of a notification, the normal processing time is within 21 working days from the payment of above described fee and the date of secureness of a valid application. A notice of no objection will be issued by CIR to a company that applied for deregistration and that would be in the case if no tax liabilities and outstanding tax matters are due on the company. In other case, a notification will be issued by the CIR to company in which outstanding liabilities and matters will be stated. Once all outstanding liabilities and matters are cleared the request after completing the lower portion of notification can be submitted again. For such re-submission of the application no further fee is payable.
Scope of Charge
On every person the tax on profits is charged:
According to the Section 14 (1) of Hong Kong tax law, profits that are raised from the sale of capital assets are not included in the charge.
A word ‘person’ defined under Section 2 (1) includes a:
In the Section 2 (1) of Hong Kong tax law, the word ‘Trade’ is defined as including ‘every manufacture and trade’ and ‘every concern and adventure in the nature of trade’.
Though a trade being carried on may be suggested by the frequent sales and purchases, but an isolated transaction may amount as an adventure in the nature of trade and due to this reason the profit from this type of transaction still be taxable.
Question of Fact
Seeing all the circumstances of the case, this is a question of fact that needed to be determined that whether a trade is being carried out or not.
Badges of Trade
It was observed in Royal Commission on the taxation of income and profit that, in determining that whether a taxpayer is carrying on a trade or not or looking for setting up a business in HK, there are 6 badges of the trade that are considered to be the relevant:
Now we will be seeing these six badges one by one:
Subject matter of transaction
An asset is considered to be a trading asset if no personal enjoyment nor income is yielded by the asset.
In a case of Fraser, it was observed that, an isolated transaction was made by a woodcutter of buying and selling the large quantity of whisky. In term of his own consumption the quantity of whisky was too large. It was held by the court on the judgement that it was an adventure in the nature of trade.
In a case of Rutledge, it was observed that, an isolated purchase and the sale of the large quantity of rolls for toilet was held to be an adventure in the nature of the trade.
In case of Martin, it was observed that, 44 million yard of linen was bought by an agricultural machinery merchant. An organization was set up by him in order to advertise and sell this linen. The profit that he held from this business to be taxable.
Length of Ownership of Goods
The asset would more likely to be considered as the trading asset if the period of ownership is shorter.
However, this factor may or may not be conclusive alone at all. In the case of Beautiland Co Ltd it was observed that, the shares were required by a taxpayer setting up an office in Hong Kong that was engaged in the development of property project at Tin Shui Wai. These share were acquired by that company on 28 June 1979. Then these shares were sold on 6 November 1979. This transaction was not held to be trading.
Depending upon the nature of Hong Kong business formation of taxpayer, a sale even after a long period of holding may consider to the trading. In a case of Sincere Insurance and Investment Co Ltd it was observed that, properties that are immovable and held by an insurance company for a period of more than 20 years before sale were considered to be assets and due to this reason the profit was held taxable. This is due to the reason that, for an insurance company, investment assets are considered as current assets that may be realizable willingly to meet possible claims.
The only fact that an asset was taken for the purpose of a quick resale does not make the transaction a trade necessarily. It is mandatory to look as a whole at the facts for example frequency, organization etc. On the commodities and future dealing the loss was incurred by the taxpayer and it was claimed the deduction of loss from his assessable profits. The reference for this statement is taken from the case D 57/94.
Frequency of Similar Transactions
It was suggested by the repeated transactions of same kind that it may be carried on as a trade. However, it was held board of review for real estate transaction that, a trade may be consists of one transaction. If a person buys a real property with such intention of profit making by resale than such thing is regarded as carrying on a trade given that profit on the sale will be subjected to profit tax. Even though this resale may be his first transaction of property.
In a case of Pogson it was observed that, 30 driving schools were sold after forming by the taxpayer to invest the profit in new company registration in Hong Kong. Except for the first driving school it was accepted by him that these transactions were of trading transactions.
In order to safeguard the fluctuation price of the nickel for a related company, a sole proprietor of a business of transportation had entered into a transaction. It was noted by board of review that:
In the judgment of case D 38/96 it was observed that, the loss was held to be not deductible.
Work on the Property
Alteration or work done on the original property, or the setting up of an organization to sell the property is also an indication of the trading.
A quantity of South African brandy was required by the association, shipped in to United Kingdom, mixed it with French brandy, sold it in frequent lots after re-caking. This transaction by association were held to amount to a trade. The reference for this statement is taken from the case of Cape Brandy Syndicate.
In a further case D 42/98, it was seen that a school teacher was not allowed to deduct the loss that was incurred in transaction of foreign exchange against her total income under personal assessment. This conclusion was made by the board of review for the reasons given below:
Circumstances responsible for Disposal
If the original intention was not resale, then the transaction will not be trading but an emergency, unexpected subsequent event or factor other than that causes the taxpayer to change his intention.
In a case D 10/88 it was observed that, in an uncompleted building a unit was bought by the taxpayer for setting up a business in HK. After it was discovered by him that, another property would be developed by someone in front, and that would block the sea view for his unit, he sold his unit. The profits that he obtained from this sale was not held taxable.
Motive for Profit Seeking
This may be the most important factor that, if property is acquired by a person with this intention that he would make the profit after resale, then it is very likely that this transaction amounts to the trading.
In a case of Clark, it was observed that, a farm was bought by the taxpayer with intention of immediate resale to invest the profit for the purpose of new company registration in Hong Kong. The profit attained from this immediate resale was held to be taxable.
In another case of Taylor, it was observed that, a piece of land was purchased by the taxpayer and in this purchasing his intention was to build a house for use of his own residence. That house was sold subsequently as his wife refused to live in it. As there was no motive of profit seeking behind this sale so it was not held to be trading.