What are the symbols of trade or circumstances under which a taxpayer rendering Hong Kong incorporation services allowed to trade?

In this blog we will have thorough discussion on symbols of trade. These badges or symbols of trade are basically the circumstances under which a taxpayer in Hong Kong is allowed to trade. In this discussion we will go through some case studies to understand such scenario. We will also be seeing the original intention that determine on evidences and factors.

Symbols of Trade

If action of taxpayer having sole proprietorship HK, goes beyond what might be expected of non-trader who is seeking to sell an asset of that class. This scenario was seen in a case of the HK Sheng Kung Hui Foundation and Church body. It was observed that, a large estate was owned by these Ts, two charitable institutions together in Tai Po. The old name of Tai Po was (‘the Old Lots’). This area was comprised of restricted building land and agricultural land. An orphanage was built on this land since 1930s. It was explored by Ts, the possibility of developing the Old Lots since the 1970s. A firm of architect was employed by Ts to the government for a re-grant and surrender in December 1990. In return of the New Lot by Government, the Old Lots were surrendered to the Government on 17 November 1993. A number of developers were invited on 2 July 1993 and were given two opportunities:

  • To purchase the new Lot (‘Option A’).
  • To enter into a joint venture agreement for development of new Lot (‘Option B’).

A developer submitted the tender on (‘Option B’) and it was accepted by the Ts on 12 August 1993. Ts entered into joint venture agreement with developer, on 3 December 1993. While pursuing this joint venture agreement, Ts also became entitled to the 94 car parking spaces and 129 units in the development. The profits tax was imposed on Ts, amounting to $186 million, due to the profits on sale of car parking spaces and these units.

On appeal to board of review it was found by board of review that, activities were performed by Ts in relation to the Old Lots in a clear and planned way. The view behind this process was to maximize the income for development. It was held by board of review that:

  • By September 1989 there was a change of intention and this was due to the reason that, as from that period the latest re-provisioning of the home and development of the Old Lots, or the facilities provided by the homes became separate projects’; or
  • In the substitute, in December 1990 the intention was changed when it was applied by architect for a re-grant and surrender.

The appeal of Ts to the court of first instance was dismissed. The ‘enhancement for realization’ principal was discussed by the court of appeal on further appeal and it overturned the decision of the board of review. It was held by court of appeal that only reasonable and true conclusion was that as there was no change of intention from trading to capital holding by September 1989 or in December 1990. Then court of appeal remitted the matter to the board of review to consider whether the change of intention occurred or not:

  • In August 1993 or
  • December 1993 or
  • On some other date or dates alternatively (other than September 1989 or December 1990).

The decision of court of appeal was upheld by the court of Final Appeal, on appeal made by the CIR, from the line of authorities cited in judgement of court leaded to decision in case of Taylor, that no ‘enhancement of realization’ principal could be derived.

The conduct of T in the years 1989 and 1990 had not gone beyond what might be expected in similar circumstances from a non-trader owner. For its conclusion, board of review was relied on the significant event. The conclusion appeared to be the fact that, ‘the re-provisioning of the home, the development of the Old Lots or facilities provided by the homes, became separate project’. It might be explained by this fact that, why it was decided by Ts to sell all the Old Lots. A conclusion that, an intention to trade which had begun could not be supported by a decision to sell. In the same way, a finding of intention to trade could not be supported by fact that Ts applied for re-grant and surrender. The symbols of trade had considered by the board of review. These were identified by McHugh NPJ in case of Lee Yee Shing. The board of review failed to acknowledge the seventh symbol and this symbol was of critical importance. This symbol of trade is related to whether the taxpayer rendering Hong Kong incorporation services has expended money, time or effort to sell the commodity or asset that goes beyond the expectations from a non-trader seeking to sell an asset of that class. The board of review was unable to consider whether it was intended by Ts to sell merely as a trader or as owner and for these reasons, its conclusion was corrupted and set aside properly. In September 1989 and December 1990 there was no evidence to support a finding of change of intention.

There was no principle of ‘enhancement for realization’ as held by the court of appeal. It was stated by McHugh NPJ in case of Lee Yee Shing that, ‘No principal of law defines trade’. To take into account all the circumstances and facts of the particular case, not only ‘enhancement for realization’ principal opposed to comprehensive approach it was also inconsistent with the judicial statements. It was suggested by these judicial statements that, the act of expending time, effort and money on an asset for enhancement of its sale price might be sufficient on its own to support a finding of an intention to trade. It was observed in a case of Hudson’s Bay Co that, it did not lay down a proposition of law to this effect that, whenever a land is developed by a property owner from laying sewer, selling plots and making roads, a trade can never be carried on by him. It is not mandatory that, the sale of land that has been further subdivided was no more than a resourceful way of perceiving the asset to the best advantage. It could be the case with area where a piece of land was divided into many allotments. But the respective allotments where planned subdivisions took place at large scale, involving construction after laying of roads, services and other improvements and the allowances of parklands. All of these amounted to improvement and development of the land to such a level that it was not possible to say that it was only a simple realization of an asset.

In spite of its error while applying the so-called principle of ‘enhancement for realization’, the court of Appeal had right to overturn the conclusion of board of Review. It was finding of board of review that; the change of intention took place by September 1989 at the latest or by December 1990 alternatively. This finding of board of review was no formulated with a specific accuracy in accordance with the requirement stressed by Lord Wilberforce in case of Simmons.  

If had option A been accepted by the taxpayers, a completely sale of land, it was tough to see that they would be trading in land. It could not be simply said that, a firm objective had been formed to commit to either Option A or Option B before it had been determined by taxpayers to accept Option B i.e., before 12 August 1993. As a result, the choice of September 1989 not late than a particular time or December 1990 alternatively as the time of change of intention cannot be supported as it was not logical.

Obviously, the fact that land was restricted building and agricultural land had been overlooked by the board of review as it would not generate a very attractive price if it were to be sold in same way. For ascertaining the maximum value that it could collect and finding out the potential of the concerned property, the activities and steps taken by Ts were mandatory. A taxpayer should be aware of these laws before set up Hong Kong limited company for the purpose of trade.

Original Intention of Evidence

It is accepted law that, for the determination of an asset as a trading stock or fixed asset, the original intention is the crucial factor. That intention is used to be the intention of taxpayer at the time of acquiring or purchasing the asset. The well-known rule that is set out in case of Lionel Simmons Properties Ltd is that:

An intention to trade is required by trading. Normally the basic question raised is that whether intention existed at the time of accession of the asset.

However, a mere hope is not sufficient if it is not realizable or realistic. The above stated intention of taxpayer having company incorporation HK, cannot be certain. That intention must be supported by the objective evidence.

Factors for Determination of the Original Intention

On this issue there are a large number of board of review cases. It should be keep into mind that, with the taxpayer burden of proof lies, hence it is duty of taxpayer who having a sole proprietorship HK need to mention sufficient evidence to convince the board of review that with the so-called intention the assets were acquired originally.

It is shown by cases of board of review that, the points given following are relevant to prove whether a profit-seeking motive exists:

  • Fairness of finance;
  • Classification in the prospectus, accounts, tax returns or other documents as discussed in case of Chinachem Investment;
  • Adequacy of income i.e., whether personal satisfaction or high income yield is produced by the assets.
  • Internal memoranda, correspondence or documents other than that (for example prospective tenants or letters to bankers) for disclosing the taxpayer’s intention.
  • Minute of board of director as discussed in the case of Stanwell Investments Limited, where intention to hold long-term was not stated by the taxpayer company. It was considered by the Court of first Instance that, this should not be interpreted as unfavorable evidence to taxpayer as this type of intention was stated in minute of its parent company.
  • The offer for purchase was whether solicited or unsolicited by the taxpayer.
  • Whether the devaluation allowance had been declared on the assets.
  • Whether there were notice for rental or resale.
  • Manner of accession. Assets that are acquired forcefully were more likely to be inherited assets than trading assets. However, where further activities were carried out by taxpayers in addition to the mere realization, he might be compressed to be trading. The reference for this statement is taken from the case of Pilkington.

In case of California Copper Syndicate Ltd., it was observed that a taxpayer company purchased the copper mines. This company incorporation HK did not required capital to develop these purchased copper mines at the time of purchase. It was held by the authorities that in the nature of trade, this sale of mines was an adventure.

 The fact that a taxpayer company had only a share capital of amount $2 is often pointed by CIR. It points fact for supporting the conclusion that intention could not be a holding of long-term. However, in case of Stanwell Investments it was ruled by Court of First Instance that, the board of review was not right in assessing the financial ability of Stanwell to carry the property to Stanwell alone by reference. The board of review must to have had regard to economic ability of its group of companies and parent company as well.

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