Global

Details

  • Service: Tax, International Corporate Tax, Global Compliance Management Services
  • Type: Regulatory update
  • Date: 1/14/2013

Hong Kong - Franchise termination payment not taxable business income 

January 14:   The Hong Kong Court of Appeal affirmed that a lump-sum payment received by the taxpayer when its franchise agreement with the airport authority was terminated was not earned by the taxpayer from the carrying on of business, but arose outside the course of the taxpayer’s business activity and thus was not taxable under section 14. Aviation Fuel Supply Co. v. CIR, (4 December 2012).

Summary

The taxpayer entered into an agreement with the airport authority to finance, design, construct, and commission a fuel service facility. As part of the agreement, the taxpayer entered into a lease with the airport authority to occupy the side for a 20-year period.


The airport authority, under terms of the agreement, elected to terminate the lease, and paid approximately US $457 million to the taxpayer.


The Inland Revenue Department asserted that this amount was subject to tax under section 14 of the Inland Revenue Ordinance; the taxpayer countered that the amount was of a capital nature and not taxable.


The Court of First Instance agreed with the taxpayer. On appeal, the Court of Appeal in December 2012 upheld the decision of the Court of First Instance that the payment was not earned by the taxpayer from the carrying on of business and thus was not taxable.


Read a January 2013 report [PDF 377 KB] prepared by the KPMG member firm in Hong Kong: Aviation Fuel Supply Co. Ltd. v. CIR – nature of compensation payment – capital or revenue



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