For banks and other persons whose head offices are situated outside
Hong Kong, Rules 3 and 5 of the Inland Revenue Rules provide methods for
determining the profits
of their branches and permanent establishments2 in methods are, however, only applicable where the the branches and permanent establishments in Hong
Kong do not disclose their true profits arising in or derived from Hong Kong.
Under Rule 3, the same proportion of the total profits of the bank as the assets of the Hong Kong branch bear to the total
of the bank would be treated as profits of
For the purposes of determining bank, similar adjustments for tax
the Hong the total purposes
would be made in been necessary had
accounts of the whole of those
bank as would have profits been liable to
that the estimate
above method would the amount of the profits
be inappropriate, of the Hong Kong
he may branch.
Under Rule 5, the same proportion of the total profits of the enterprise as the turnover in Hong Kong bears to the total turnover of the enterprise would be treated as profits of the permanent establishment in Hong Kong. For the purposes of determining the total profits of the enterprise, similar adjustments for tax purposes would be made in the accounts of the enterprise as would have been necessary had the whole of those profits been liable to tax under the Ordinance. If the assessor is of the opinion that the above method would be inappropriate, he may compute the amount of the profits derived from Hong Kong on a fair percentage of the turnover in Hong Kong.
Paragraph 5 of Article 7 of the Comprehensive Arrangement stipulates
that no profits will be attributed to a permanent establishment by reason of the
“Permanent establishment” for the purposes of Rule 5 is defined to mean a “branch, management or other place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of his principal or has a stock of merchandise from which he regularly fills orders on his behalf”.