A company A will open another service company B to avoid tax. Company A pays Company B a large number of administrative service fees. Company B and company A may be related. As a result, A can pay less tax, and B can Deduction salaries paid to connected persons and provision of benefits to offset the administrative service fee income received from A. To combat such tax avoidance arrangements, the Inland Revenue Department has issued Interpretation and Practice Note No. 24 of the Inland Revenue Ordinance to explain how to deal with such tax avoidance cases.
The guideline emphasizes that B and A must operate on an arm’s length basis when dealing with A for A to be entitled to a deduction for administrative service fees. To prove that B has an independent status, the taxpayer should keep the following documents and records for inspection by the Inland Revenue Department:
• Contracts or agreements related to administrative services (including service content and service fee basis)
• Records of making or amending terms
• Provide invoices and receipts for service charges
• Work records for day-to-day services
• Payment fee documentation (eg bank records)
• Employment contracts of employees employed by the respective companies
The Inland Revenue Department found out that the taxpayer set up company A to avoid tax, and then paid the administrative service fee to a related company B, thereby reducing the overall tax. The Inland Revenue Department will, in accordance with Interpretation and Practice Notes No. 24 of the Inland Revenue Ordinance, examine the nature of the service provided by Company B receiving the administrative service fee from Company A. The service must be a [Eligible Service] that generates taxable profits of Company A., the amount of administration fee paid is limited to those eligible services.
Eligible services refer to the provision of basic facilities to meet the daily operations of Company A, such as office rent, management fees, supply of water and electricity, staff (responsible for administration, secretarial or clerical work), cleaning services, supply of stationery, instruments, and machinery, etc… but not including Some professional services, that is, professional services provided by training or experience, such as accountants, doctors, lawyers, etc. The Inland Revenue Department does not accept these professionals as administrative workers and also provides professional services, so as to include administrative work as eligible services.
The above information is for reference only. If in doubt, we welcome your tax inquiry