(2020-21) VOLUME 35 INLAND REVENUE BOARD OF REVIEW DECISIONS Case No. D7/19 Profits tax – royalty payment – whether deductible – whether incurred for the production of profits – trade mark licence agreement – whether artificial transaction – whether sole or dominant purpose to obtain a tax benefit – offshore company - management and control of trademarks thru a Hong Kong agent – whether carrying on business in Hong Kong – Sections 14, 15, 16, 17, 21A, 61, 61A, 68(4) of IRO Panel: William M F Wong SC (chairman), Maurice Joseph Chan and Hau Pak Sun. Dates of hearing: 5 December 2017, 4-5 & 13 March 2019 and 20-21 May 2019. Date of decision: 30 July 2019. Both Company A and Company B (collectively, the ‘Appellants’) are subsidiaries of Company E. Company J is a related company to the Appellants and Company E. Company A is a private company incorporated in Hong Kong in 1896. Company B is an establishment incorporated in Country AE in 1991. Company B has never carried out any retail business in Hong Kong, nor does it own or occupy any premise in Hong Kong. It has no employees in Hong Kong. The management and control of the trade marks registered in the name of Company B was done by Company J. Since registrations in 1992, Company B has remained the registered proprietor of the HK Marks (comprising of Goods Marks and Service Marks). On 28 September 2012, Company B and Company A entered into the 2012 Licence. Under the 2012 Licence, Company B gave Company A a non-exclusive licence to use the HK Marks with effect from 1 January 2012. Over the Relevant Years (for years of assessment of 2012/13, 2013/14 and 2014/15), Company A paid HK Royalties in accordance with the 2012 Licence to Company B. Company A contends that the HK Royalties to Company B are deductible under section 16 of IRO. Company B contends that it is not liable to be taxed for its profits. 137 (2020-21) VOLUME 35 INLAND REVENUE BOARD OF REVIEW DECISIONS Held: 1. Over the Relevant Years, Company A’s payment of HK Royalties to Company B is not deductible under sections 16, 61 and 61A of the IRO: 1.1 Section 16 - The HK Royalties were not incurred by Company A in the production of profits. 1.2 Section 61 - The 2012 Licence was ‘artificial’ within the meaning of section 61 of the IRO. 1.3 Section 61A - The acquisition of a tax benefit was the sole or dominant purpose of the 2012 Licence. 2. Company B’s profits in licensing the HK Marks are assessable under section 14, or alternatively, taxable under sections 15(1)(b), 20B(2), and 21A(1) of the IRO: 2.1 Section 14 - Company B had been carrying on business in Hong Kong, and that the HK Royalties had arisen in Hong Kong from Company B’s business in Hong Kong. 2.2 Section 15(1)(b), 20B(2), and 21A(1) - Company B is liable to taxation (in the name of Company A). - 100% of the HK Royalties are taxable under section 21A(1)(a). 3. Company B is not entitled to rely on Article 12(2) of the Agreement between the Government of the Hong Kong Special Administrative Region of the People’s Republic of China and the Government of the Principality of Country AE for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital. 138 (2020-21) VOLUME 35 INLAND REVENUE BOARD OF REVIEW DECISIONS Appeal dismissed and costs order in the amount of $20,000 imposed. Cases referred to: Commissioner of Inland Revenue v Common Empire Ltd (No 2) [2007] 3 HKLRD 75 Cheung Wah Keung v Commissioner of Inland Revenue [2001] 1 HKLRD 172 Wood v Holden (2006) 78 TC 1 Perenco Holdings v HMRC [2015] UKFTT 65 Real Estate Investments (NT) Limited v Commissioner of Inland Revenue (2008) 11 HKCFAR 433 HKSAR v Lam Kwong Wai (2006) 9 HKCFAR 574 Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 Shui On Credit Co Ltd v Commissioner of Inland Revenue (2009) 12 HKCFAR 392 D94/99, IRBRD, vol 14, 603 So Kai Tong v Commissioner of Inland Revenue [2004] 2 HKLRD 416 Zeta Estates v Commissioner of Inland Revenue (2007) 10 HKCFAR 196 Zeta Estates v Commissioner of Inland Revenue [2006] 2 HKLRD 208 Commissioner of Inland Revenue v Swire Pacific Ltd [1979] HKLR 612 Federal Commissioner of Taxation v Snowden & Willson Pty Ltd (1958) 99 CLR 431 Magna Alloys and Research Pty Ltd v Federal Commissioner of Taxation (1980) 33 ALR 213 Spriggs v Commissioner of Taxation [2009] HCA 22 Commissioner of Taxation v Cooke [2004] FCAFC 75 Federal Commissioner of Taxation v Lau (1984) 6 FCR 202 Federal Commissioner of Taxation v Just Jeans (1987) 72 ALR 213 Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 John Fairfax and Sons Pty Ltd v Federal Commissioner of Taxation (1959) 101 CLR 30 Bentleys, Stokes & Lowless v Beeson (HM Inspector of Taxes) [1952] 2 All ER 82 D44/92, IRBRD, vol 7, 324 Commissioner of Inland Revenue v Secan (2000) 3 HKCFAR 411 Nice Cheer Investment Ltd v Commissioner of Inland Revenue (2013) 16 HKCFAR 813 Perfekta Enterprises Ltd v Commissioner of Inland Revenue [2018] HKCA 301 Ngai Lik Electronics v Commissioner of Inland Revenue (2009) 12 HKCFAR 296 Ransom v Higgs [1974] 1 WLR 1594 Scandecor Developments AB v Scandecor Marketing AB [2001] UKHL 21 Stichting Greenpeace Council v Income Team Ltd t/a Green Peace [1996] 1 HKLR 269 Celine SARL v Celine SA [2007] ETMR 80 Koninklijke Philips Electronics NV v Remington Consumer Products Ltd (Case C-299/99) [2003] Ch 159 139 (2020-21) VOLUME 35 INLAND REVENUE BOARD OF REVIEW DECISIONS Christian Dior v Evora [1997] ECR I-1603 Kerly’s on Trade Marks [16th Ed] British Sugar v James Robertson [1996] RPC 281 Acqualeisure Industries v Impag Toys Europe (unreported, HCA 3933/2000, 4 May 2006) PCCW HKT Datacom Services Ltd v Hong Kong Broadband Network Ltd [2018] 4 HKLRD 575 Euromarket Designs v Peters [2000] ETMR 1025 Apple Corps v Apple Computers [2006] EWHC 996 British Sugar v James Robertson [1996] RPC 281 Belvedere’s Trade Mark Application [2007] ETMR 18 Canon Kabushiki Kaisha v Metro-Goldwyn-Mayer [1999] 1 CMLR 77 Wood v Capita Insurance Services Ltd [2017] AC 1173 Eminent Investments (Asia Pacific) Ltd v DIO Corp [2019] HKCA 606 Lewison on the Interpretation of Contracts (6th ed.) In the Matter of Lehman Brothers International [2012] EWHC 2997 Thorner v Major [2009] UKHL 18 Scammell & Nephew Ltd v Ouston [1941] AC 251 Richemont International SA v Da Vinci Collections (HK) Ltd (unreported, HCA 204/2006, 7 July 2006) Hotel Cipriani v Cipriani (Grosvenor Street) Ltd [2010] RPC 16 Nerium Biotechnology Inc v Nerium International [2018] HKCFI 674 ABG Juicy Couture LLC v Bella International Ltd (unreported, HCA 1764/2008, 8 September 2014) 深圳市德力康電子科技有限公司 v Joo Sik Hoi Sa LG (unrep, HCMP881/201, 26 March 2014) Red Bull GmbH v Sun Mark Ltd [2012] EWHC 1929 Frost Products v F C Frost Ltd [2013] ETMR 44 Ping An Securities Ltd (2009) 12 HKCFAR 808 WD & HO Wills (Aust) Pty Ltd v Commissioner of Taxation (1996) 65 FCR 298 Federal Commissioner of Taxation v Phillips (1978) 20 ALR 607 Cecil Bros Pty Ltd v The Commissioner of Taxation of the Commonwealth of Australia (1964) 111 CLR 430 Northern & Shell Plc v John Laing Construction Ltd [2002] EWHC 2258 (upheld by Court of Appeal ([2003] EWCA Civ 1035) Seramco Limited Superannuation Fund Trustees v Income Tax Commissioner [1977] AC 287 Commissioner of Taxpayer Audit and Assessment v Cigarette Company of Jamaica Limited [2012] STC 1045 Metal Manufactures Ltd v Federal Commissioner of Taxation [1999] FCA 1712 Matter of Sherwin-Williams [NY Tax Div. of Tax Appeals, DTA No 816712, June 5 2003] Re Sherwin–Williams Co v Tax App Trib of the Dep’t of Taxation & Fin. of NY, 12 AD3d Alesco New Zealand Ltd v Commissioner of Inland Revenue [2012] 2 NZLR 252 Penny and Hooper v Commissioner of Inland Revenue [2011] NZSC 95 140 (2020-21) VOLUME 35 INLAND REVENUE BOARD OF REVIEW DECISIONS Commissioner of Inland Revenue v Tai Hing Cotton Mill (Development) Ltd [2008] 2 HKLRD 40 Commissioner of Inland Revenue v Tai Hing Cotton Mill (Development) Ltd (2007) 10 HKCFAR 704 Commissioner of Inland Revenue v HIT Finance Ltd (2007) 10 HKCFAR 717 Ure v Commissioner of Taxation (1981) 50 FLR 219 Inland Revenue Commissioner v Hang Seng Bank [1991] 1 AC 306 Lee Yee Shing v Commissioner of Inland Revenue [2008] 3 HKLRD 51 Commissioner of Inland Revenue v Bartica Investment Ltd (1996) 4 HKTC 129 Mitchell v Egyptian Hotels Ltd [1915] AC 1022 Malayan Shipping Co Ltd v Federal Commissioner of Taxation (1946) 71 CLR 156 ING Baring Securities v Commissioner of Inland Revenue [2008] 1 HKLRD 412 Sulley v Attorney General (1860) 5 Hurlstone and Norman 711 American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1979] AC 676 Bowstead & Reynolds on Agency, paragraph 1-006 Bowstead & Reynolds on Agency, paragraph 2-031 Commissioner of Inland Revenue v Wardley Investment Services (1992) 3 HKTC 703 Mehta of Bombay v Commissioner of Income Tax (1938) LR 65 Indian Appeals 332 Liquidator, Rhodesia Metals Ltd [1940] AC 774 Kwong Mile Services v Commissioner of Inland Revenue [2004] 3 HKLRD 168 Kim Eng Securities v Commissioner of Inland Revenue [2007] 2 HKLRD 117 Commissioner of Taxation (NSW) v Kirk [1900] AC 588 Orion Caribbean Limited v Commissioner of Inland Revenue [1997] STC 923 Commissioner of Inland Revenue v HK-TVB International Ltd [1992] 2 AC 397 Thorpe Nominees Pty Ltd v Federal Commissioner of Taxation (1988) 19 ATR 1834 Nathan v Federal Commissioner of Taxation (1918) 25 CLR 183 Smidth v Greenwood [1921] 3 KB 583 Grainger & Son v Gough (Surveyor of Taxes) [1896] AC 325 Firestone Tyre and Rubber Co Ltd v Lewellin [1957] 1 WLR 464 Yates (Inspector of