Question 4 (24 marks)

Tom Limited is incorporated in Hong Kong and carries on the business of garment trading in

Hong Kong. It has been decided by the Inland Revenue Department, and Tom Limited accepts,

that the whole of its profits is subject to profits tax. All the garments are sold by Tom Limited

in Hong Kong bearing a stylized "X" logo, which is a trademark owned by Cherry Limited,

Tom Limited's holding company incorporated in Singapore. Cherry Limited does not carry on

business in Hong Kong. Under a written agreement, Tom Limited agrees to pay royalties to

Cherry Limited for the use of "X" trademark on the products.

Required:

(a) Discuss whether and if so, how Cherry Limited is chargeable to Hong Kong profits tax

in respect of the royalty income received from Tom Limited.

(9 marks)

(b) For this part only, assume that Cherry Limited sets up a subsidiary in HK ("HK sub."),

following which Cherry Limited grants the right to use the trademark to HK sub. at a

royalty, and then HK sub. will sublicense the right to use the trademark to Tom Limited

accordingly also in return for a royalty fee. HK sub. will earn a gain from the sublicensing.

Advise the relevant Hong Kong tax implications to all the parties involved,

and comment whether your answer to Question (a) would be different.

(7 marks)

(c) For this part only, assume that Cherry Limited is considering expanding its sales into the

Hong Kong market. Cherry Limited is going to set up a branch in Hong Kong (HK

Branch) to liaise directly with the potential customers in Hong Kong. HK Branch will

negotiate with customers on the terms of sales based on a set of prescribed policy from

Cherry Limited. Customers' orders will be accepted and signed by the HK Branch,

following which goods will be shipped directly from Singapore to the buyers in Hong

Kong.

Based on the Inland Revenue Ordinance and Rules, discuss the Hong Kong tax

implication, if any, to Cherry Limited arising from the sales made in Hong Kong through

its HK Branch. Where applicable, you should also address any assessment basis for Hong

Kong tax purposes.

(8 marks)

Note: There are no Comprehensive Double Taxation Agreements between Singapore and the

Hong Kong Special Administrative Region.

(Total for Question 4: 24 marks)