Hong Kong: Upfront payment, but not necessarily ongoing royalties, under trademark sub-licensing arrangement held Hong Kong-sourced
Court of Appeal decision
The Court of Appeal on October 17, 2024, upheld the lower court’s decision that an upfront payment received by the taxpayer under a trademark sub-licensing arrangement was revenue (not capital) in nature and was Hong Kong-sourced, but held that the lower court erred in law in determining that royalty income derived by the taxpayer under the same sub-licensing arrangement was Hong Kong-sourced.
The case is: Patrick Cox Asia Limited v Commissioner of Inland Revenue
Summary
The taxpayer licensed trademarks from its parent and sub-licensed them to Japanese companies at the behest of a UK company, which made an upfront payment to the taxpayer for (1) obtaining the right to participate in the business of selling certain products under the trademarks in Japan, and (2) sharing the profits derived from such business (with the UK company receiving 60% of the royalties from the Japanese companies while the taxpayer received 40% of the royalties).
The Court of Appeal held that the upfront payment was Hong Kong-sourced because the profit producing activities in respect of the upfront payment (i.e., acquisition of the master license) were conducted solely in Hong Kong. However, the court held that the royalty income was attributable at least in part to activities performed by the UK company on behalf of the taxpayer in Japan in managing the sub-licensees, and thus that the lower court erred in determining that all of the royalty income was Hong-Kong sourced.
For more information contact a KPMG tax professional:
David Ling | davidxling@kpmg.com