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Court denies deductions for management fees paid under the general anti-avoidance provisions of section 61A
The Court of First Instance (CFI) recently upheld the decision of the Board of Review (BOR) that an arrangement undertaken by a trading company (the Taxpayer) was a transaction entered into for the sole or dominant purpose of obtaining a tax benefit under section 61A of the Inland Revenue Ordinance (IRO).
The arrangement involved the Taxpayer segregating its previous function of managing the production processes at factories in mainland China in respect of orders it placed with them into a separate offshore group company. Thus, the management fees paid by the Taxpayer to the offshore company, found to be deductible under section 16 of the IRO, were nevertheless disallowed.
This alert discusses how the BOR and the CFI approached the issues involved in their consideration of the application of the provisions of section 61A to the facts of the case.
Clients who have any questions on the potential application of section 61A to a transaction that they have entered into can contact their tax executives.