Hong Kong Taxation

River Co is a company incorporated and carrying on business in Hong Kong. River Co is principally engaged in the sales of luxury silk clothing through approximately 100 department stores. The procurement staff of River Co liaise with overseas suppliers in different countries and source new suppliers by going to trade exhibitions around the world. The procurement staff would preliminarily negotiate the purchase contracts with suppliers in the countries where the exhibitions are held, or the suppliers are located. However, the procurement team must 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. To facilitate the sales activities in the PRC market, River Co has sent its staff to have meetings with distributors in the Mainland to negotiate and conclude the sales contracts. Sales in Hong Kong market are however all made by River Cos sales team in Hong Kong. River Co is also engaged in the business of investment holding in overseas subsidiaries. In view of the increasing trend for the demand of intra group financing and treasury services from its overseas subsidiaries, and with the profits tax concession granted under the relevant provisions of the IRO for these activities in recent years, the management of River Co plans to set up a treasury management function in 2020. Alternatively, River Co may establish an entity in Hong Kong specifically and exclusively for conducting corporate treasury activities for its overseas subsidiaries, on the basis that the entity can enjoy the profits tax concession.

Required:

(a) For River Co, explain the chargeability of its profits from sales made in the Hong Kong and Mainland markets. In particular, whether the Hong Kong and Mainland sales profits should be subject to, or exempt from, Hong Kong profits tax with reference to relevant provisions and case laws. (13 marks)

(b) By reference to the information about the sales made in the Hong Kong and Mainland markets, discuss the general deducibility of related expense, whether there are any major potential offshore tax risks, and any major potential non-tax risks. (7 marks)

(c) In the contexts of the relevant IRO provisions, explain advantages of being a qualifying corporate treasury center (QCTC) and whether it is appropriate for River Co to apply for QCTC status. (8 marks)