Patrick Cox Asia Limited v The Commissioner of Inland Revenue

 [2024] HKCA 944 is the first source case under s.14 of the Inland Revenue Ordinance to be considered by the Court of Appeal (CA) in over 10 years and underlines the importance of properly characterising the profits of the taxpayer before one can proceed to ascertain their geographical source.

The appellant (Taxpayer) was the Hong Kong-based licensor of the trademarks of the Patrick Cox fashion label, having acquired such license from its UK-based parent company. It entered into a cooperation agreement with a Japanese company (BLBG) to exploit the trademarks in Japan. The Taxpayer agreed to act as the licensor whilst BLBG agreed to locate Japanese sub-licensees and operate the licensing program in Japan. By agreeing to enter into the cooperation agreement, the Taxpayer was paid an upfront payment of GBP500,000 (Upfront Payment); and, by acting as licensor, Taxpayer was also entitled to a 40%-share of the royalties earned from Japanese sub-licensees (Royalty Income).

For the Upfront Payment, the CA agreed with the Court of First Instance (CFI) and Board of Review (BOR) that its source was Hong Kong, which was the place where the Taxpayer acquired the trademarks from its parent company and entered into the cooperation agreement. Further, it held that the Upfront Payment was not a capital receipt.

For the Royalty Income, the CA differed with the CFI and BOR, holding that, based on an analysis of all the facts, the relevant question was not what the Taxpayer did to justify its share of the royalties but what it did to earn the royalties as a whole from the Japanese sub-licensees. It followed that the profits were sourced in part from Hong Kong, where the Taxpayer acquired the license, and in part from Japan, where BLBG operated the licensing program.

acted for the Revenue before the CA, CFI and BOR.

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