Hong Kong: Sourcing of profits from container trading and leasing (court decision)

The Court of First Instance on August 30, 2024, held that the lower court did not err in concluding that the taxpayer carried on a trade or business in Hong Kong, but erred in its approach to determining whether the taxpayer’s profits from container trading and leasing businesses were sourced to Hong Kong.

The case is: Touax Container Investment Limited v. Commissioner of Inland Revenue

The taxpayer is a Hong Kong-incorporated company engaged in the business of sale and leasing of shipping containers. During the relevant years of assessment (YOAs), the taxpayer purchased shipping containers and leased them to a related company in Singapore, which then subleased the same to unrelated lessees outside Hong Kong. The Singapore company acted as the manager for the leased shipping containers and was responsible for the repair and maintenance of shipping containers on behalf of the taxpayer. Under a lease agreement between the taxpayer and the Singapore company, the Singapore company distributed 94.5% of the profits generated from the sub-leasing of the containers to the taxpayer and retained the remainder as commission. 

Although the taxpayer asserted that it had no business assets, bank accounts, employees, or agents acting on its behalf in Hong Kong and claimed that all the profit producing activities were done by its non-Hong Kong resident directors outside Hong Kong, the taxpayer declared a Hong Kong address as its registered office and principal place of business in its audited financial statements.

The lower court held that the taxpayer carried on a business in Hong Kong based on its findings from the documentary evidence that the taxpayer declared a Hong Kong address as its registered address and principal place of business in its audited financial statements and used that address in various transactional documents with suppliers and customers. The Court of First Instance noted that not much activity is necessary to constitute the carrying on of a business, and thus the lower court’s decision was reasonable based on the documentary evidence.

The lower court also held that the taxpayer had profit-producing operations in Hong Kong and thus its income could be sourced to Hong Kong. The Court of First Instance agreed that the place of the taxpayer’s operations was the relevant determinative factor but held that the lower court failed to make sound findings as to where the taxpayer’s operations were carried out.

David Ling | davidxling@kpmg.com