 [2025] HKCA 956 concerned an appeal against decisions by the Inland Revenue Board of Review (Board)

and the CFI which (1) rejected the taxpayer’s (P) deduction of certain management fees charged by P’s associated company in the Mainland (Transaction); and (2) found that the Transaction was carried out with the sole or dominant purpose of obtaining a tax benefit, which could then be disregarded under s.61A of the Inland Revenue Ordinance (IRO).

Kwan VP dismissed the appeal for two main reasons.

First, the grounds for challenging Board decisions are limited: (1) an error in law may be challenged; (2) findings of fact (primary or secondary) may be challenged as errors of law only where perverse or irrational and contrary to the true and only reasonable conclusion; and (3) appellate courts are bound by the questions of law on which leave to appeal is granted under s.69 of the IRO.

As the taxpayer bears both the legal and persuasive burden in tax appeals, the absence of favourable findings could only be overcome by showing both an error of law, and that the error fell within the permitted grounds of appeal – thresholds which the taxpayer failed to meet.

Second, it is necessary to distinguish “true profit-generating transactions” and activities “ancillary and incidental” to profit generating transactions.

The Court rejected P’s argument that there was no tax benefit under s.61A of the IRO because, in the alternative hypothesis (AH) (where P would have done the production management work itself), the profits from such work would be sourced outside of Hong Kong and not be subject to Hong Kong tax, thereby increasing P’s profit.

On true analysis, there would be no additional profit in the AH. As P, as a trader, would not

be doing any manufacturing itself, its production management activities in the Mainland would not be profit producing nor render any of P’s profits sourced in the Mainland, applying 

P thus enjoyed a tax benefit under the Transaction because it could claim the management fees paid as additional deductions (relative to the AH).

, instructed by the Department of Justice, acted for the Respondent.

Members

Recruitment

Mentions

More on Recent Judgments

Court of Appeal reaffirms high threshold for tax appeals and clarifies principles on source of profits

About

Members

Recruitment

What's New