On 19 July 2019, the Inland Revenue Department (IRD) released Departmental Interpretation and Practice Note 60 (DIPN 60) which explains the concept of permanent establishment (PE) and the methodology for attributing profits to Hong Kong permanent establishments.
Under the double taxation agreement or arrangement (DTA), the permanent establishment status is to be determined in accordance with the relevant provisions under the relevant DTA. For a non-DTA territory resident person, the question is to be determined in accordance with Part 3 of Schedule 17G. The definition of permanent establishment provided in Part 3 of Schedule 17G is consistent with and has the same broad effect with the permanent establishment article 5 of the OECD1 Model Tax Convention (MTC) where a permanent establishment in Hong Kong means if it has a fixed place of business in Hong Kong through which the business of the enterprise is wholly or partly carried on.
The rule for attribution of profits is the separate enterprises principle. Profits are attributed to the permanent establishment in the amount that it would have made if it were a distinct and separate enterprise engaged in the same of similar activities under the same or similar conditions dealing wholly independently with the non-Hong Kong resident person. This includes the assumption that the permanent establishment would have such equity and loan capital attributed to it as it would reasonably be expected to have if it were a separate entity. Expenses are only attributable to the permanent establishment in Hong Kong where they are incurred for the purposes of producing chargeable profits of the permanent establishment regardless of whether the permanent establishment reimburses sums initially paid away by another part of the entity. Where expenses are incurred for other purposes apart from those of the permanent establishment in Hong Kong alone, then a reasonable apportionment should be made to calculate the amount attributable to the permanent establishment of the non-Hong Kong resident person.