To avoid tax, the taxpayer will open a company A, and then pay an administrative service fee to a related company B, which will reduce the overall tax. According to Interpretation and Practice Notes No. 24 of the Inland Revenue Ordinance, it is proposed how the Inland Revenue Department will determine the deduction of the administrative service fee when a company A pays an administrative service fee to a related company B. In addition to the fact that the administrative service fee must be limited to [Eligible Services], the service fee must also be paid in accordance with Section 16 of the Tax Ordinance to generate Company A’s assessable profits. On the other hand, service charges are not of the nature of expenses set out in Section 17 of the Ordinance. Therefore, the Inland Revenue Department will require Company A to provide a detailed statement listing the following information when filing tax returns:
• The administrative service fee in the claim should list the amount of each service and the relevant service content in the collection
• Explain how each service fee resulted in Company A’s assessable profits for the year of assessment
• Explain why the amount of each service fee is reasonable and consistent with the normal business environment
A company A pays an administrative service fee to a related company B. The amount should be set in accordance with the normal business environment. If not, the Inland Revenue Department will consider that the service fee is arranged for tax avoidance, rather than completely generating company A’s needs. Assessed profits, if the sole purpose of the arrangement is to obtain a tax benefit that directs the overall tax to be reduced, the Inland Revenue Department will not agree to grant a deduction for administrative service fees.
However, the taxpayer may have good business reasons to explain that the service company is indeed required to provide services, and payment of administrative service fees is necessary. Therefore, the Inland Revenue Department has set a limit for the administrative service fee between related companies A and B, stipulating that the administrative service fee claimed by the taxpayer is all the expenses (i.e. [cost factor]) incurred in the direct provision of [eligible services] plus A price increase is a reasonable profit, which is usually 12.5% of the [cost factor].
The above information is for reference only. If in doubt, we welcome your tax inquiry