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TA U9 Profits 3

This document contains tutorial questions and answers about Hong Kong taxation law. It discusses whether interest income earned in various scenarios would be taxable under Section 15 of the Inland Revenue Ordinance, and whether interest expenses incurred would be deductible under Section 16. Key topics covered include interest income from bank deposits, interest expenses from loans used for business purposes, and exemptions from taxation.

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Edwin Law
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110 views3 pages

TA U9 Profits 3

This document contains tutorial questions and answers about Hong Kong taxation law. It discusses whether interest income earned in various scenarios would be taxable under Section 15 of the Inland Revenue Ordinance, and whether interest expenses incurred would be deductible under Section 16. Key topics covered include interest income from bank deposits, interest expenses from loans used for business purposes, and exemptions from taxation.

Uploaded by

Edwin Law
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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THE UNIVERSITY OF HONG KONG

SCHOOL OF BUSINESS

ACCT3107/BUSI0018 – Hong Kong Taxation


Tutorial Questions
Unit 9 – Profits Tax (3)

Answer 20

(a) Under s.15(1)(g), sums received by or accrued to a person, other than a


corporation, carrying on a trade, profession or business in Hong Kong by way of
interest are deemed taxable if (1) the interest is derived from Hong Kong and (2)
the interest is in respect of the funds of the trade, profession or business in Hong
Kong.

In this question, the interest was earned on money placed in deposit in Hong Kong
and thus was considered as derived from Hong Kong based on ‘provision of credit’
test. On the other hand, the interest was in respect of the business receipts
available for use in the sole proprietor’s business. Therefore, the interest would be
deemed as taxable under s.15(1)(g).

However, with effect from 22 June 1998, an exemption order was issued under
s.87 to exempt from profits tax all interest accrued on or after 22 June 1998 on
deposits with financial institutions in Hong Kong. An exception to this exemption
is when the deposit was used as a pledge against borrowing on which interest
expense incurred was deductible under s.16(2)(c), (d) or (e) and where s.16(2A)
does not apply. In this question, the deposit was not pledged for any borrowing.
Therefore, the exemption order would apply to exempt the interest from profits tax
although it is sourced in Hong Kong.

(b) Under Section 15(1)(f), sums received by or accrued to a corporation carrying on a


trade or business in Hong Kong by way of interest is deemed as taxable if the
interest is arising in or derived from Hong Kong.

In this question, Tasty Bakery Company Limited is carrying on business in Hong


Kong and thus s.15(1)(f) may apply. The interest was earned from a deposit
placed with Shenzhen branch of Bank of China. By virtue of ‘provision of credit’
test, the deposit money was first made available to the bank in Shenzhen, i.e.
outside Hong Kong. As a result, the provision of credit was outside Hong Kong
and interest income is regarded as sourced outside Hong Kong. Section 15(1)(f)
does not apply to tax the interest income. The fact that the deposit money was
originated from the sale money earned from Hong Kong shops is irrelevant since
the nature of money has changed once it is put into bank deposit.

TA_U9_Profits_3 1
(c) Mr. Chan is an individual, not a corporation. Therefore Section 15(1)(f) cannot
apply. The deposit money does not represent Mr. Chan’s business fund, and thus
Section 15(1)(g) does not apply either. As a result, the interest income derived by
Mr. Chan, though sourced in Hong Kong, is not taxable under profits tax in Hong
Kong. There is no interest tax in Hong Kong. As a conclusion, no tax is payable
by Mr. Chan in respect of the interest income in question.

(d) Promoting goods in Hong Kong constitutes carrying on a business in Hong Kong.
Interest income derived from Hong Kong deposits is sourced from Hong Kong.
Therefore, the Hong Kong Branch should be subject to profits tax in respect of the
interest derived from the Hong Kong deposits under section 15(1)(f). The above
mentioned interest income exemption order is not applicable as the relevant deposit
has been used to secure for bank borrowing and the interest expense in respect of
that bank borrowing is deductible under profits tax.

Answer 21

(a) As the factory was used by PC’s printing business for producing chargeable profit,
s.16(1)(a) is satisfied. The loan was borrowed from a financial institution, the
condition under s.16(2)(d) is fulfilled. As the loan was not secured by any deposit
generating non taxable interest income and there is no arrangement in place
whereby interest payment will ultimately paid back to PC or any connected person,
the limitations under s.16(2A) and (2B) do not apply. Accordingly, the interest
expense should be deductible.

(b) Assuming that the office was used by PC’s business for producing chargeable
profit, s.16(1)(a) is satisfied. The loan was borrowed from a financial institution,
the condition under s.16(2)(d) is fulfilled. However, the loan was secured by a
fixed deposit registered in the name of HC which does not carry on any business in
Hong Kong. Accordingly, the interest income derived from the fixed deposit
would not be taxable under s.15(1)(f).

As the bank loan is secured by a deposit generating non-taxable interest income,


the limitation under s.16(2A) applies and the interest expense paid by PC allowable
for deduction would be reduced by the amount of tax-free interest.

(c) On the assumption that the fund raised from the issue of the debentures has been
applied for the purpose of generating assessable profits to PC, the interest paid on
the debentures should be deductible under s.16(1)(a) and (2)(f). In this case, there
is no arrangement in place whereby interest payment will ultimately paid back to
PC or any connected person. The limitation under s.16(2C) does not apply.

TA_U9_Profits_3 2
(d) Where the loan is used exclusively for the purchase of trading stock and the lender
is not closely connected to the borrower in any of the relationship set out in s.16,
the interest will satisfy the conditions of s.16(2)(e). Alternatively, the loan was
borrowed from an overseas financial institution, condition under s.16(2)(d) is also
satisfied.

The borrowing was not secured or guaranteed by any deposit but by a personal
guarantee given by Mr. CFO. The limitation under s.16(2A) does not apply.
There is no arrangement in place whereby interest payment will ultimately paid
back to PC or any connected person. The limitation under s.16(2B) is also not
applicable. Accordingly, the interest expenses can be deductible.

(e) Strictly speaking, trade debts are not “money borrowed”. Accordingly, the general
rule s.16(1) instead of s.16(1)(a) should be applied to determine the deductibility of
interest on trade debts. As all profits derived from printing business in Hong Kong
are taxable to PC, the interest in respect of trade debts due to SC should be
deductible.

TA_U9_Profits_3 3

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