BUSI 0018 Hong Kong Taxation

Tutorial Questions
Unit 8 Profits Tax (2)

Question 19
Part I
State and explain whether the following items of income derived during the year of
assessment 2009/10 are chargeable to Hong Kong profits tax:
(a)

Interest on money placed on a 24-hour call deposit by the sole proprietor of a

bakery business (carried on in Hong Kong) with the Tsimshatsui Branch of
Bank of China (Hong Kong). The money was intended for settling the flour
bill upon receipt of the demand note from the supplier. The deposit was not
used to pledge for any bank borrowing. Instead the sole proprietor had made
personal guarantee to the bank for obtaining fund to finance the bakery
business.

(b)

Interest on money placed on call deposit by Tasty Bakery Company Limited

with the Shenzhen branch of Bank of China. Tasty Bakery Company Limited
carries on business in Hong Kong and the deposit money represents its daily
sale money earned from the Hong Kong shops.

(c)

Interest on money placed on fixed deposit by a Mr. Chan with a local branch
of Bank of China (Hong Kong). The deposit money represents Mr. Chans
daily personal savings.

(d)

Interest from fixed deposits placed with the Causeway Bay branch of HSBC
Bank by an oversea companys Hong Kong branch. The branch was
responsible for promoting the companys toy products in the Hong Kong
market. The deposits have been used to secure for the bank borrowings and
interest expenses on such borrowings are deductible under profits tax.

Part II
Discuss whether or not the compensation payment received by a company in respect
of the following is taxable:
(a)

Insurance compensation received in respect of the cost of trading stock

damaged in fire.

(b)

A supplier cancelled his supply agreement with Company A. As a result,

Company A received a compensation from this supplier in pursuance to the
agreement.

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Question 19 (cont)
Part III
(a)

HK Textiles Co. Ltd. has decided to cease business in the near future. The
board of directors has announced such an intention. As a result of which, each
of the staff is entitled to receive a severance payment which is to be calculated
on a basis suggested in the Employment Ordinance. Discuss the deductibility
of such severance payment in the final tax return of HK Textiles Co. Ltd.

(b)

CK Property Development Co. Ltd had incurred interest expenses in financing

the development of a housing estate for sale. Before the completion of the
construction, the relevant interest expenses were capitalized in the account
property under development. Discuss whether such expenses are deductible
for profits tax purpose during the period of construction.

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Question 20
Printing Co. Ltd. (PC) commenced a printing business in Hong Kong from July
2005. All of its profits derived from the printing business have been returned as
assessable profits. Its ultimate holding company, Holding Company (HC) was
incorporated in the USA. PC has a wholly owned subsidiary, Sub Co. (SC), which
was incorporated in Taiwan and is carrying on a business of paper manufacturing
there. SC was one of PCs paper suppliers. Both HC and SC have no business
activities in Hong Kong. Mr. CFO was the Chief Financial Officer of PC. During the
year ended on 30 June 2008, PC incurred the following interest expenses:
(a)

$100,000 paid to a local bank in respect of a loan borrowed for the purpose of
acquiring new factory units in Kwun Tong. The loan was secured by a
mortgage over these properties. The factory units have been used for PCs
printing business.

(b)

$200,000 paid to a local bank. The bank loan was used to buy an office in
Central and was secured by a fixed deposit with another local bank registered
in the name of HC.

(c)

$90,000 paid on debentures issued by PC. The debentures were listed on the
Luxembourg Stock Exchange.

(d)

$50,000 paid to a bank in the USA. The loan was used to finance purchases of
materials from a supplier in the USA. Repayment of the loan was guaranteed
personally by Mr. CFO.

(e)

$20,000 paid to SC in respect of the outstanding trade debts due to SC.

Required:
Discuss the deductibility of each of the above interest expenses incurred by PC for
Hong Kong profits tax purposes.

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