In this blog we will be discussing on the factors that are relevant in defining that if a person selling or buying shares is carrying a business or not. Then we will explore the application of tax by Hong Kong taxation system on business of taxpayer who have Hong Kong business formation and doing mutual trading.


In the court of final appeal, it considered by the Mr. Justice McHugh NPJ that for determining whether a person who sells or buys shares were carrying on a business, following factors are relevant:

  • To be selective in buying and selling after carefully examining the prospects and history or shares of a company.
  • Using a method or system that, seeks to lessen the elements of chance and also either based on or guided by the rules that are statistically validated.
  • Produce the sell and buy signals using a computer program that employs an automated set of rules to generate these signals. Computer with help of these signals also indicate how and when to trade and how much shares should be sold or bought at specific times.
  • Geopolitical events have great impact on the trade. Hence as a result of these events assessing the likely direction of specific classes of shares or direction of market. Other than geopolitical events these direction of market can be assessed by changes in interest rates, government policies, balance of payment, price of oil, specific commodities or gold or in the value of currencies. 
  • The use of strategies for risk management to manage the purchase and capital and instruments. These instruments include options to protect investment in specific shares and stop-loss orders.
  • Engaging the computer assisted trading to utilize the differences in prices of shares in different markets.
  • Investigation of large sums.
  • Having a high consignment of shares.
  • Specifically, short term purchases, borrowing to purchases of finance.
  • The use of valuation methods for determining that whether the market has undervalued some specific shares. These valuation methods include price/sales ratios or comparable earnings/price or flows of discounted cash.
  • Searching the catalysts that may cause the price of shares to rise after purchase and unlock the hidden value. These catalysts include possible restructuring of a company’s business, potential take overs or the ‘spin-off’ of some non-profitable divisions.

Although it was thought by Mr. Justice McHugh NPJ that, there were a number of unsatisfactory elements in the case stated and the reasoning of Board of Review. It was also said by him particularly that, ‘the inadequate scope of function of an appellant court on a case specified means that this appeal must not be entertained rather dismissed’.

It was applied by T (the applicant) and his wife for judicial review. And they also attempted to reverse the previous decisions of courts. They tried to do so on the basis that, ‘the case stated procedure was unconstitutional’. In the case of Yeung Yuk Ching and Lee Yee Shing Jacky, the application was dismissed by the court of first instance. It was considered by the judge that; board of review did not exercise the state’s judicial power. Judge said that, admittedly the applicants could not bring an appeal on, the access to the court was enjoyed by the applicants with full jurisdiction to deal with all proper complaints against his tax assessments. It was concluded by the judge that:

  • In the court of first instance, previous appeals were conducted by the applicants, the court of appeal and court of final appeal were valid and binding on the applicants.
  • Any provision of basic law was not violated by the statutory reign in the Inland Revenue department.

The appeal of applicant was dismissed by the court of appeal.

The person having set up company in HK are more likely to be trading in the shares weather they are stockbroker himself, employees of stockbroker, or person connected with the share trading.

In a case of D 46/09 it was observed that, the only share of a Shelf Company was acquired by a taxpayer. A commercial property was acquired further by that company. That acquired property was funded by the mortgage loan. At the request of a commercial property purchaser, the transactions were delayed a number of times after completion of conveyancing. It was purposed by commercial property purchaser for acquiring the commercial property by transfer of shares of Shelf Company instead of common transaction. On the profit that was derived from the transfer of the subject share, the profit tax assessment was raised by the assessor. It was contended by the T that, he had no intention of selling the subject share. And T also stated that Shelf Company would not entered into purchase and sale agreement for commercial property if he had willful to sell the subject share at the starting point. It was considered by the assessor that, to complete the trading of commercial property by Shelf Company only an alternative way was the sale of the subject share. It was held by board of review that:

  • The Shelf Company was a special purpose vehicle in a plan that was acquired for dealing with the commercial property. If that shelf company had not a feasible future or business, then it had no use to speak about intention to acquire the subject share as capital asset. Shelf Company could not pay off the mortgage loan due to lack of financial resources. It also could not pay the loan of director due to holding the commercial property on the basis of long term.
  • An adventure was carried on by T, upon a comprehensive supposition of a particular case’s. And also the subject shares were acquired by T as a trading stock.


A corporation is usually for trading purpose. It was observed in the case Lewis Emanuel & Son Ltd that, if a corporation holds shares longer than an individual and carries out fewer transactions, it may still be held to be trading.

In a case of D 39/12 it was observed that, there was a private company named as T. A business and / or trade was carried on by it as a licensed investment adviser. Initial public offering (IPO) advisory services were provided by it to Company H group and Company B group under company H and company B agreements respectively. In respect of that services the share options were granted to T. These respective options that were given to T were duly exercised by it and then sold the relevant shares at considerable profits. It was faced by T that, gains on disposal of the relevant shares were the gains raised from the ejection of ‘long term investments’. Due to this reason that gain was not chargeable to the profits tax hence had suffered the loss. It was concluded that for deriving the gains on disposal of the relevant shares the price of initial public offering should be adopted. It was held by board of review after dismissing the appeal of company T, that:

  • Nothing was paid by T for relevant shares. It would not be a fruitful exercise to use the initial public offering price for recalculation of losses and profits.
  • T had provided a lot of services so, the options that were granted to it were constituent of remuneration of T for the services it provided.
  • Those profits that were being raised were not profits arising from the sale of stock principal assets.
  • According to Section 14 (1) of Hong Kong tax law, the gain on the ejection of the relevant shares were profits derived or arising in from the trade of T and / or business.
  • The intention behind the purchase of relevant shares was to sell upon the initial public offering of the relevant group. This type of intention was usually not an intention that was usually observed while holding or purchasing the relevant shares as capital asset.

Illegal Trading

If an illegal activity amount to trade or an adventure in the essence of trade, then profit from illegal activity is taxable. This phenomenon is applicable to any type of illegal activity.

Gambling and Betting

Gambling is only for entertainment purposes usually so it is not considered as trading. Although gambling is habitual but still it is neither a business nor trading. This phenomenon was supported by the case of Graham Green. In that case it was observed that, a gambler of regular horse racing was not held to be carrying on a business. This was his hobby to bet on horses he was not carrying it as trade or business.

However, if gambling is done by a group of connected persons than it is likely to be trading. It was confirmed by the authorities in New Zealand and Australia that, wins of trainers and jockeys from the horse gambling amount to receipts from a profession or business.

In a case of D 55/87 it was observed that, an amateur jockey won the gambling horse race. He was not held to be receipts from profession, business or trade. As described earlier, if gambling is done by a group of connected persons, trainers or professional jockeys than it is likely to be trading and hence taxable on horse gambling wins.

Mutual Trading

Profit cannot be made by a person out of himself. Due to this reason, if a body of persons with its members having set up company in HK involved in the trading, then profits from trading is not taxable under common law. In a case of New Life Insurance Co., it was observed that, excess was not held taxable, that was derived from the excess of premium from the persons as a member of company over the cost of their insurance. However, Section 23AA of Hong Kong tax law, subjects’ mutual insurance corporations to tax expressly.

In a case D 27/98 it was ruled out by board of review in a case concerning the property tax of rental income from car parks that, mutual trading principle was not applicable to property tax.


A wider scope is covered by the business than trade. According to Section 2 (1) of Hong Kong tax law, the word ‘Business’ is defined to include the following:

  • Leasing all of the rented property of some part of it rented property by corporation.
  • Poultry, agricultural undertaking and pig rearing.
  • Leasing a part of property of any premises by a person that was held by him under a lease other than from HKSAR government.

If the taxpayer doing business in Hong Kong is a corporation then, bare yielding receipt of income may amount to a business.

In a further case D 31/11 it was observed that, there were some certain evidences that, there were some activities of T that were limited to accounting ones and took place in Hong Kong. It was held by board of review that; business was not carried on by T in Hong Kong. 

When has business begun?

The question that when has business begun is the question of fact. It is not mandatory that in a Hong Kong business formation date of the opening of shop and the date of starting of service or retailing business must be same. It was held in the case D 41/88 that; a business had already been commenced by the restaurant during preparatory period. A preparatory period for that restaurant was the period in which, taxpayer raised loans and capital for Hong Kong limited company formation included professional fees, acquired goodwill of another business, acquired business name, outfitted and leased premises, purchased supplies and fittings, sourced products and foods and rented staff quarters and office space.

When has business terminated?

Business may have been terminated by a person, and a person is not considered to be carrying the business if he/she have a mere understanding of assets of business. In a case of Tai Shun Investment Co Ltd. it was observed that, a company went into voluntary liquidation. A property development business was carried on by company previously. Outstanding installments were collected by liquidator. Liquidator collected some rent in arrears and upon the completion of installments conveyed the legal title to the purchaser of eight flats. It was held by the court that liquidator was not doing anything unnecessary and whatever he was doing, that was for the purpose of finalization of liquidation.

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