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The term “permanent establishment” is defined in Rule 5 of the Inland Revenue Rules to mean “a branch, management or other place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of his principal or has a stock of merchandise from which he regularly fills orders on his behalf.”

- Registered office itself should not be regarded as “permanent establishment”.

- some other jurisdiction's function departments, like Mainland PRC, will ask Hong Kong's definition on "permanent establishment" for their functional purpose.

- Newly enacted IRO on "transfer pricing rules" need to refer to the idea of "permanent establishment". 

  • The fundamental transfer pricing rule ("Rule 1") in the Bill has the effect of requiring a tax adjustment when connected parties have entered into transactions where the pricing of those transactions differs from an arm's length price and that difference results in a potential Hong Kong tax advantage.
  • Rule 2 has a similar effect to Rule 1, Rule 2 applies the attribution of profits to a permanent establishment of a non-Hong Kong resident using the separate enterprise principle; however, Rule 2 does not apply to foreign PEs of a Hong Kong resident company. 
  • Reference:Asia-Pacific Journal of Taxation, Volume 22, Number 1, 2018

- OECD, BEPC etc. will look at "permanent establishment" also.

P.S. discussion of transfer pricing rules on Hong Kong offshore tax: Hong Kong offshore goes on existing, but the portion of profits of a group / a production/service chains allocated to Hong Kong offshore company need to be at "arm-length priced" and welled supported by evidences. So that, non-welly-supported offshore profit allocated to Hong Kong company, i.e., tax evasion by shifting profit to Hong Kong offshore, may be abolished. 

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Also, in Double Tax Arrangement signed between Mainland and Hong Kong:

Article 5


1. In this Arrangement, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially:

(1) a place of management;

(2) a branch;

(3) an office;

(4) a factory;

(5) a workshop;

(6) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

3. The term “permanent establishment” also encompasses:

(1) a building site, a construction, assembly or installation project or supervisory activities in connection therewith, but only if such site, project or activities last more than 6 months;

(2) the furnishing of services, including consultancy services, by an enterprise of One Side directly or through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continue (for the same or a connected project) in the Other Side for a period or periods aggregating more than 6 months within any 12-month period.

4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed not to include:

(1) the use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise;

(2) the maintenance of a stock of goods or merchandise belonging to the

enterprise solely for the purpose of storage, display or delivery;

(3) the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise;

(4) the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise;

(5) the maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character;

(6) the maintenance of a fixed place of business solely for any combination of activities mentioned in subparagraphs (1) to (5) of this paragraph, provided that the overall activity of the fixed place of business resulting from this combination is of a preparatory or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, where a person, other than an agent of an independent status to whom paragraph 6 applies, is acting in One Side on behalf of an enterprise of the Other Side, and the person has, and habitually exercises, an authority to conclude contracts in the name of the enterprise, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Side in respect of any activities which that person undertakes for the enterprise, unless the activities of such person are limited to those mentioned in paragraph 4 which, if exercised through a fixed place of business, would not make this fixed place of business a permanent establishment under the provision of that paragraph.

6. An enterprise of One Side shall not be deemed to have a permanent establishment in the Other Side only because it carries on business in that Other Side through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph.

7. The fact that a company which is a resident of One Side controls or is controlled by a company which is a resident of the Other Side, or which carries on business in that Other Side (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

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