THE UNIVERSITY OF HONG KONG

FACULTY OF BUSINESS AND ECONOMICS

ACCT3107 – 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 2018/19 are chargeable to Hong Kong profits tax:

(a) Sums received by a foreign film production company for allowing a Hong
Kong television company to show in Hong Kong certain designated films it
produced offshore Hong Kong. The film production company has no
representative office or agent in Hong Kong.

(b) Sums representing royalty received by a foreign patent owning company under
a licensing agreement with its associate company in Hong Kong. The patent
was previously owned by the Hong Kong associate which subsequently sold
the patent right to the foreign patent owning company. The patent was then
licensed to the Hong Kong associate for its use in Hong Kong at a royalty.

(c) Profits earned by a manufacturing company from its sale of products in Hong
Kong. The products were partly manufactured in Hong Kong and partly in the
PRC. The manufacturing activities conducted in the PRC were greatly
involved by the manufacturing company in terms of expertise, machinery, raw
materials and quality control.

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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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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