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The taxpayer was incorporated in Hong Kong by its UK parent company. The UK parent company owns certain trademarks and licensed them under a master license to the taxpayer for exploitation. Meanwhile the taxpayer entered into an agreement with a joint venture partner (JV Partner) and appointed the JV Partner as its agent to arrange sub-licensing of the trademarks for use in Japan. The royalty income from Japanese companies would be shared between the taxpayer and the JV Partner on a 40:60 basis.
Hong Kong taxation is on a territorial basis, whereby the source of sub-licensing income would generally be determined according to where the taxpayer obtained the rights and granted the sub-licensing rights. The CFI held that the taxpayer's 40% share of royalty income is Hong Kong-sourced and subject to Hong Kong profits tax, on the basis that: (i) the activities of the JV Partner in Japan are not carried out on behalf of the taxpayer and therefore cannot be attributed to the taxpayer in determining the source of its income; and (ii) the joint venture agreement and the sub-license agreements for Japan were signed by the taxpayer's director in Hong Kong.
Contact Information
For additional information concerning this Alert, please contact:
Ernst & Young Tax Services Limited, Hong Kong
- Wilson Cheng
- Paul Ho, Financial Services
Ernst & Young LLP (United States), Hong Kong Tax Desk, New York
- Charlotte Wong
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
- Gagan Malik
- Dhara Sampat
Ernst & Young LLP (United States), Asia Pacific Business Group, Chicago
- Pongpat Kitsanayothin
Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor
For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.