Taxation Law: Hong Kong

Page1
TAXATION LAW: HONG KONG
ANSWER – 1
In the case of Commercial Holdings Limited (CHL), the involvement of Profits Tax -
Interest expenditure is of main consideration and this has been covered under Section
16(2) of the Inland Revenue Rules covered under The Inland Revenue Ordinance (IRO)
which was first enacted in 1947 for imposing income taxes in Hong Kong. There are
three main sub-sections –
Sub-Section 16(2)(a) deals with interest paid on borrowings by a financial institutions.
Sub-Section 16(2)(b) deals with interest paid by a utility company.
Sub-Section 16(2)(c), (d) and (e) deal with interest factors of common businesses, such
as CHL, according to IRD, Hong Kong, (2018).
Before going into the merits of the applicable sections, it is important to understand the
term business. This has a very broad meaning and has a wider concept as compared to
trade or profession (Refer to Kwan-Nang Kwong & Anor v Commissioner of Inland
Revenue (1989) 1 HKRC 90-017 and Lam Woo Shang v CIR (1961) 1 HKTC 123).
Whereas trade and profession are considered to be the involvement of the taxpayer in
some active function, business refers to the circumstances which are conducive in
creating a passive receipt of investment income for the taxpayer (Refer to Ferguson v
FC of T (1979) 79 ATC 4261). In this case, the court mentioned four factors for
determining whether the taxpayer was carrying on a business, as per Littlewood, (2010).
1. System: organised activities; maintenance of records.
2. Scale: capital value and magnitude of the activities.
3. Repetition: continuity of the activities.
4. Profit: as the main motive.
These are since known as indicia of a business.
Under subsection 16(2)(c), (d) and (e), which deal with the cases of common businesses,
any interest payable by the borrower on borrowings from a financial institution and it
includes even foreign institutions, will be allowed as deductible in case the loan
obtained has not been secured against a deposit from the borrower or from a connected