Happy (HK) Ltd (Happy-HK) was incorporated in Hong Kong and is carrying on business in Hong Kong and principally engaged in the sales of baby & kid’s products. The Happy-HK sells products for more than 100 brands. The procurement staff of Happy-HK liaise with overseas suppliers in different countries and source new suppliers by going to trade exhibitions around the world. The procurement staff would negotiate the purchase contracts with suppliers in the countries where the exhibitions are held or the suppliers are located. Generally, the procurement team has to seek advice from an in-house lawyer in Hong Kong and further negotiate the terms and conclude the purchase contracts with the overseas suppliers via exchange of emails after they return to Hong Kong.

Happy-HK then sells the baby & kid’s toys it purchased from overseas suppliers to the distributors in Hong Kong through a sales team in Hong Kong. It also sells to over 100 distributors in mainland China. Happy-HK set up a wholly owned subsidiary in mainland China (“the subsidiary”). The subsidiary employs its own staff. Happy-HK grants to the subsidiary the general authority to negotiate and conclude sales contracts on its behalf with distributors in mainland China.

Once the distributor makes a purchase order, the staff of the subsidiary would forward the purchase order to the sales staff of Happy-HK for processing. Happy-HK is responsible for arranging shipment and issuing invoices to bill the goods sold. Distributors would settle the bills directly to the bank account of Happy-HK maintained in Hong Kong.

Mr. A is interested in taking over the baby & kid business by acquiring the shares in Happy-HK during the current year. Mr. A will acquire the shares in Happy-HK and become the direct sole owner of Happy-HK. As part of the acquisition deal, one of Happy-HK’s current shareholders has agreed to waive the outstanding loan balance due to him by the company.

Required:

1) As the external Hong Kong tax advisor to Happy-HK, write a memorandum to the Board of Directors, giving an analysis of the Hong Kong tax position of Happy-HK. Your analysis should include:

(a) the assess ability of profits (20 marks)

(b) general deductibility of related expenses(3 marks)

(c) any major potential offshore tax risks(4 marks)

(d) briefly any major potential non-tax risks(2 marks)

2) Discuss the stamp duty implications for Mr. A arising from the acquisition (5 marks)