LegCo Paper No. CB(1) 2035/95-96(02)

Banking (Amendment) Bill 1996
Tax liabilities of money brokers

The proposed regulatory regime on the money brokers does not have any implications on the tax liabilities of money brokers in Hong Kong. In other words, their tax positions before and after the proposed regulatory regime remain the same.

General tax principles

2. Hong Kong does not have any specific enactment which deals with the tax treatment of the income derived by money brokers. The taxation of their income or losses has to be determined by reference to the general tax principles under the Hong Kong Inland Revenue Ordinance (the IRO) and tax case laws. Under section 14 of the IRO, a person, including a foreign corporation, is chargeable to Hong Kong profits tax if the following three conditions are satisfied:

  1. the person must be carrying on a trade, profession or business in Hong Kong;
  2. the profits to be charged must be from such trade, profession or business carrying on by the person in Hong Kong; and
  3. the profits, not being capital profits, must be arising in or derived from Hong Kong.

3. The question of whether a person is carrying on a business in Hong Kong is a hard, practical matter of fact. In general, if a foreign entity has a permanent establishment in Hong Kong, it is more likely to be regarded as carrying on a business in Hong Kong. Under Rule 5 of the IRO, a permanent establishment means 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.

4. In determining the source of the taxpayer’s profit, one has to firstly identify the income in question, and then applies the broad guiding principle, which is "one looks to see what the taxpayer has done to earn the profit in question and where he has done it".

5. Money brokers provide brokering services for interbank foreign exchange and deposit transactions. They take bids and offers from their principals and help to bring together two independent counterparties, which include local and overseas banks to a transaction. In return, they earn commissions for these services. In this connection, it is the Department’s view that the activity which gives rise to the commission income is the arrangement of the business to be transacted between the two principals and the source of income is the place where the matching arrangement activity of the money broker is performed. If the activities are performed in Hong Kong, the fact that the counterparties to the deal are located overseas is irrelevant in determining the source of the commission income of the money brokers.

6. We note that there are two types of money brokers in the market, viz. the voice broker and the electronic broker. The former is based and operates its business in Hong Kong, while the latter is based overseas but provides services to the financial entities in Hong Kong. Because of the difference in their places of business operations, voice broker and electronic broker’s position in profit tax might be different.

Voice Brokers

7. Voice brokers are connected to their banking principals by direct wires and open boxes which allow instant communication when the button is depressed. There are presently 10 voice brokers in Hong Kong. As these voice brokers have maintained and operated through their place of business in Hong Kong, they are carrying on a business in Hong Kong. Because the voice brokers’ matching arrangements for the principals are undertaken through their dealing facilities in Hong Kong, their commission income received from both the local and overseas principals are considered as arising in or derived from Hong Kong and are, therefore, assessable to Hong Kong profits tax.

Electronic Brokers

8. The electronic brokers operate computerised interactive data system to facilitate, among others, forex transactions and interbank deposits among their subscribers. To be chargeable to Hong Kong profits tax, they must firstly be held to be carrying on a business in Hong Kong. Generally the Department will accept that the overseas electronic brokers’ commission income to be not chargeable to Hong Kong profits tax if the following conditions are satisfied :

  1. that the brokers have no staff, no office premises, and no dealing or telecommunication facilities in Hong Kong;
  2. that their Hong Kong agent does not have the general authority to conclude contracts which are binding on the brokers;
  3. that the instruction and mandate from their Hong Kong principals are received by the brokers outside Hong Kong; and
  4. that the matching arrangements for the counterparties to a transaction are conducted by the brokers outside Hong Kong.

Inland Revenue Department
September 1996

Last Updated on 15 December 1998