HK Profits Tax - Source of manufacturing profit

DIPN 21 applies to determine the source of profit;

Hang Seng Bank case: the Lordship said that the source of gross profit resulting from a transaction is a question of fact depending on the nature of the transaction, It is impossible to lay down precise rules of law by which the answer to the questof source of profit is to be determined. The Broad Guiding Principle is that "one looks to see what the taxpayer has done to earn the profit in question".

DIPN 21 - Contract operation test applies to manufacturing business;

DIPN 21 - Source manufacturing profit is divided into four types
- Wholly manufactured in HK: Taxable in HK;
- Contract processing: substantial involvement, including technical know-how, material etc, 50% exempt or fully taxable;
- Subcontracting process: A subsidiary (separate legal entity) carries out processing works. Little involvement from the HK entity who only delivery raw material to the subsidiary with a subcontracting fee. It's treated as trading transaction. Thus, governed by contract effected test, 100% taxable or exempt;
- Import processing: Sell raw material to PRC entity, buy-back finished goods when completed. Treated as trading transaction. Thus, governed by contract effected test. 100% taxable or exempt;