Summary

The Court of First Instance (CFI) handed down its judgment in Sinolink Shanghai Investments Limited v Commissioner of Inland Revenue¹ on 29 July 2026.

The CFI dismissed the taxpayer’s appeal and upheld the Board of Review’s unpublished decision that the amounts derived by the taxpayer from certain shareholder loans provided in connection with a property development project were interest, rather than return on equity investment. The Court further held that the interest had accrued to the taxpayer despite being payable in the future, and that it was sourced in Hong Kong.

In this tax alert, we summarise the CFI’s analysis and discuss our observations on the case.

Background and key facts

The taxpayer’s group entered into an investment agreement with another business group to carry out a property development project in the Chinese Mainland via a joint venture (JV) structure. Below are the key facts about the project:

a Sino-foreign JV was set up to develop the project, with the taxpayer as one of its ultimate shareholders;
the terms of the investment agreement empowered the taxpayer to control the project (via voting rights and major decision-making, etc.);
the taxpayer provided shareholder loans (the Shareholder Loan) to fund the project pursuant to the investment agreement and the advancement of the Shareholder Loan took place in Hong Kong;
interest on the Shareholder Loan (at a rate of 20% per annum) began to accrue from the date of the investment agreement (i.e. obligation to pay interest commenced from that date) even though the payment of the accrued interest would only take place when distributable cash became available;
any accrued and unpaid interest on the Shareholder Loan would have priority over other distributions to shareholders;
the taxpayer recorded, in each of the years concerned, shareholders’ loan interest Income or interest income (the Sums) in its profit and loss accounts;
separately, the taxpayer was entitled to an annual remuneration of 2% of the investment amount for acting as the project manager of the project until the project was completed; and
there were two conditions imposed by the Mainland government on the project:
- Branding Requirement – the other JV partner group was to remain as the “public face” of the project
- Shareholding Restriction – there were restrictions on the JV partner group’s transfer of its interests in the project to third parties.

The issues before the Court

The main issue in the case was whether the Sums were interest or return on equity investment. The CFI also considered whether the Sums represented anticipated profits, and whether they had accrued to the taxpayer and were sourced in Hong Kong for the purposes of section 15(1)(f) of the Inland Revenue Ordinance (IRO)².

The taxpayer’s case

The taxpayer’s key arguments were: (i) it only had one composite business in reality, namely the JV participation in the project in the Chinese Mainland, (ii) the effective cause of its entitlement to the Sums was the generation of profits from the project, (iii) the Sums thus represented anticipated profits from the project and a return on equity investment, and (iv) the Shareholder Loan was in substance not a loan but an equity contribution to the project, structured as such only to comply with the Branding Requirement and Shareholding Restriction.

The CFI’s judgment and analysis

The CFI’s judgment and analysis are summarised as follows:

Nature of the taxpayer’s business – Rather than having one indivisible composite business (i.e. the JV participation in the project), the taxpayer had multiple roles under the investment agreement and its project financing activities should be looked at separately from the overall business of property development. A single act of making a loan can constitute the carrying on of a business.
Effective cause of the Sums – Focusing on the activities of the taxpayer (and not other group companies), the Sums were earned by the advancement of the Shareholder Loan in Hong Kong.
Nature of the Sums – One should focus on the substantive legal effect and the consequences of a transaction. Based on the expressed contractual terms of the investment agreement, the Shareholder Loan is a loan, and its features bear all indicia that the Sums were interest (e.g. a fixed return and the priority in payment of the accrued interest). The fact that the payment of the accrued interest may be deferred or was dependent on contingencies does not change the nature of the Sums being interest.
No taxation of unrealised or anticipated profits – The Sums were not anticipated profits from the project, but the future profits from the project were the source of the moneys used to pay the Sums. As such, the Board did not fail to apply the principles that profits are not taxable until realised and that profits must not be anticipated³.
“Accrued” for the purposes of section 15(1)(f) – Accrual is concerned with the vesting of rights, albeit that those rights may not be immediately enforceable. It follows that interest may accrue even if it is payable later, provided that the entitlement to its payment has accrued (as opposed to the taxpayer’s proposition that accrual requires a present enforceable right to payment).
Source of the interest income under section 15(1)(f) – The CFI upheld the Board’s analyses that (i) the profit-producing activity was the taxpayer’s advancement of the Shareholder Loan, which was done in Hong Kong, (ii) even taking into account the provision of the funds to the taxpayer by its parent company for the Shareholder Loan, the provision of such funds was also done in Hong Kong, and (iii) the negotiation and signing of the investment agreement were at most antecedent acts.

Based on the above, the CFI dismissed the taxpayer’s appeal and held that the Sums were interest income and sourced in Hong Kong.

KPMG observations

We set out below our observations from the case:

Legal form vs economic substance – This case illustrates that, in determining the nature of a transaction or a sum, both the Court and the Board give significant weight to the legal form, including the terms of the relevant legal documents and the contractual rights and obligations they create. The accounting treatment may also be a relevant consideration. A transaction or a sum should not be recharacterised lightly by merely relying on the doctrine of “substance over form”, unless there is a strong justification for doing so having regard to the factual circumstances and contractual context.
Source rule for interest income – It is interesting to note that the Court in this case agreed with the Board that the profit-producing activity for the interest income was the advancement of the Shareholder Loan (i.e. the provision of credit) by the taxpayer and that the negotiation and signing of the investment agreement are at most antecedent acts. In addition to the place of provision of credit, it appears that the place where the parent company provided the funds for the Shareholder Loan to the taxpayer is also of some relevance. However, it is not clear from the published judgment whether the funds provided by the parent company to the taxpayer took the form of an equity contribution or a loan⁴.

If you have any questions or require assistance regarding the above developments, please feel free to contact us via taxservicesenquiry@kpmg.com.

1. The CFI judgment can be accessed via this link to the Judiciary website: legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=183312&currpage=T

2. Sums received by or accrued to a corporation carrying on a trade, profession or business in Hong Kong by way of interest derived from Hong Kong shall be deemed as chargeable trading receipts under section 15(1)(f) of the IRO.

3. These principles were set out in Nice Cheer Investment Limited v CIR. The Court of Final Appeal’s judgment in the case can be accessed via this link to the Judiciary website: https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=90096&QS=%28%7BNice+Cheer%7D+%25parties%29&TP=JU

4. The Inland Revenue Department has been taking the position that lending of funds sourced from a borrowing is not “simple loan of money” and that the “provision of credit” test does not apply to such case for determining the source of the interest income.