SINOLINK SHANGHAI INVESTMENTS LTD v. COMMISSIONER OF INLAND REVENUE

HCIA 1/2024

[2026] HKCFI 2895

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

INLAND REVENUE APPEAL NO 1 OF 2024

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JUDGMENT

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1.  Introduction

1.1  Pursuant to leave granted by my decision dated 4 February 2025 (“Leave Decision”) under section 69 of the Inland Revenue Ordinance Cap 112 (“IRO”), this is the appeal by the Appellant (“SSI”) against the decision dated 29 December 2023 (“2023 Decision”), by which the Board of Review (“Board”) dismissed the SSI’s appeal against the determination dated 20 September 2020 (“Determination”). By the Determination, the Respondent (“CIR”)[1] rejected the Appellant’s objections to the profits tax assessments for 2006/07 to 2009/10 and 2012/13 (“Relevant Years”)[2].

1.2  As noted at Leave Decision §§2.8 and 2.9, SSI’s profit and loss accounts showed that, in each of the Relevant Years, it had income described as “Shareholders’ Loan Interest Income” or “Interest Income” (“Sums”). In its profits tax returns, SSI claimed that, notwithstanding the Sums’ descriptions, they should be treated in substance as a return of investment from a Project (as defined below) situate in the Mainland and not interest income in nature. The Inland Revenue Department disagreed and issued profits tax assessments to SSI for the Relevant Years, which assessments were affirmed in the Determination, on the basis that the Sums were interest income arising in or derived from Hong Kong for the purpose of section 15(1)(f) of the IRO.

1.3  As noted at Leave Decision §3.5, the parties agreed that the Board had to determine the following four issues (“Agreed Issues”):

(1)  Issue (1): Was SSI a person carrying on a trade, profession or business in Hong Kong in the basis period for each of the Relevant Years?

(2)  Issue (2): Were the Sums accrued to SSI by way of interest under section 15(1)(f) of the IRO?

(3)  Issue (3): Was the geographical source of the Sums Hong Kong for the purpose of section 15(1)(f) of the IRO?

(4)  Issue (4): Was the geographical source of the Sums Hong Kong for the purpose of section 14 of the IRO?

1.4  By the 2023 Decision, the Board answered each of the Agreed Issues in the affirmative. I shall refer to the Board’s findings and conclusions below.

1.5  The questions for which leave to appeal was granted are as follows (“Questions”):

“Upon the true construction of the Part 4 of the IRO and in particular sections 14 and 15(1)(f) and by reason of the facts agreed by the parties and found by the Board, did the Board misconstrue the terms and requirements of each of those 2 sections by one or more of the following errors of law[3]:

(a) Failing to adopt and apply the 3 preconditions of section 14 of the IRO to chargeability (as explained in Hang Seng Bank Ltd v CIR [1991] AC 306 at 318E-F) to the Board's findings of fact, which require the conclusion that the Applicant's contingent future entitlement under the Investment Agreement to the payments concerned could only ever derive from SSI’s sole business, namely its joint-venture participation in the Project[4] in Shanghai, PRC which it was funding (“Question (a)”);

(b) Failing to adopt and apply Part 4's “core principles that profits are not taxable until they are realized and that profits must not be anticipated” (Nice Cheer Investment Ltd v CIR (2013) 16 HKCFAR 813 at [40]) (“Question (b)”);

(c) Misconstruing and misapplying each of the 2 preconditions to the application of section 15(1)(f)'s deeming provision (neither of which, on the facts found, was met) namely, that the sums concerned be:

(i) “sums received by or accrued to a corporation... by way of interest” by failing to adopt and apply the principle of law that interest is not “accrued” (as distinct from “accruing”) unless and until the creditor has a present enforceable right to payment of the interest (“Question (c)(i)”); and

(ii) interest derived from Hong Kong (“Question (c)(ii)”).”

1.6  As will be seen below, the bolded parts of the Questions inform on the factual and legal parameters of this present appeal. At the hearing, I was ably assisted by Mr Barrie Barlow SC (leading Mr Adrian Lee) for SSI and Mr William Wong SC (leading Mr Juliam Lam) for CIR.

2.  Background

2.1  The factual background is set out at 2023 Decision Section B (§§2-20) and Section C (§§21-32). Section B sets out the facts agreed between the parties and Section C those facts which the Board considered to be indisputable by reference to (1) the terms of the various relevant agreements entered into and (2) the representations made publicly by Sinolink Worldwide Holdings Limited (“SWH”). The matters set out in this section are largely adopted from the 2023 Decision, with my supplements.

(i)  The basic facts

2.2  SSI is and was at all material times a wholly-owned subsidiary of SWH, a company listed in Hong Kong. In its profits tax returns, SSI described its principal activity as investment holding.

2.3  On 14 November 2005, SWH and Rockefeller Group International Inc (“Rockefeller Group”) executed a confidential Memorandum of Understanding (“MOU”). The MOU set out the basic terms and conditions of a (then) contemplated investment by SWH in respect of the Waitanyuan project in Shanghai (“Project”). Essentially, the Project involved the redevelopment of a piece of land situate at the Huangpu District of the Shanghai municipality into a mixed-use precinct containing residential, commercial, hotel, shopping and entertainment facilities along with other public amenities. The Project was obtained by Rockefeller Group in early 2004, when it signed a framework agreement with Shanghai New Huangpu (Group) Co Ltd (“NPH”), an entity controlled by the Shanghai Huang Pu People’s Government.

2.4  The MOU was signed against the background that Rockefeller Group wished to enlist a real estate developer with experience in the Mainland as its partner in the Project. As noted at Leave Decision §§5.4 and 6.15-6.16, the Board accepted, as part of the relevant factual matrix, the existence of the “Branding Requirement” and the “Shareholding Restriction”. Whilst Rockefeller Group wished to cooperate with SWH, there were certain limitations created by the Branding Requirement and the Shareholding Restriction. As explained at Leave Decision §6.16, the limitations created by the Branding Requirement and the Shareholding Restriction were due to the requirements imposed by the Shanghai Haung Pu People’s Government, namely (1) Rockefeller Group was to remain as the “public face” of the Project and (2) there were restrictions on Rockefeller Group’s transfer of its interests in the Project to third parties. In this appeal, Mr Barlow relies heavily on the Branding Requirement and the Shareholding Restrictions as the relevant factual matrix against which the relevant agreements are to be construed. On a high level of generality, Mr Barlow contends that the Shareholder Loan (as defined below) advanced by SSI was in substance its equity investment into the Project, structured thus only to comply with the Branding Requirement and the Shareholding Restriction.

2.5  On 30 November 2005, an Investment Agreement (“Investment Agreement”) in relation to the Project was entered into amongst SSI, SWH, Rockefeller Group, Rock-Shanghai, Inc (a wholly-owned subsidiary of Rockefeller Group) (“RSI”), and Rockefeller Group Asia Pacific, Inc ("RGAP"). The recitals of the Investment Agreement provided, inter alia, that a Sino-Foreign Joint Venture (“CJV”) would be established to develop the Project. The CJV would be held by a Barbadian holding company (“SRL”), which would in turn be held by RGAP. SSI and RSI would become the shareholders in RGAP.

2.6  On 2 December 2005, RGAP, Rockefeller Group and SSI entered into an Option Agreement, granting Rockefeller Group an option to purchase in the form of Series C Shares (as defined therein) a stated percentage, not to exceed 50% of the outstanding share capital of RGAP (“Option Agreement”).

2.7  On 22 December 2005, in accordance with the requirements of the Rules Governing the Listing of Securities on the Stock Exchange, SWH issued a circular on a major transaction disclosing the details of the Investment Agreement and the Project (“Circular”) and enclosed a letter from the Board (“Board Letter”).

(ii)  The MOU

2.8  As noted at 2023 Decision §90, the MOU expressly provided that, save for the provisions headed “Confidentiality”, “Legal and Miscellaneous Fees” and “Governing Law”, it would become null and void after the execution of “definitive documents consistent with this MOU” (ie the Investment Agreement). Further, Clause 11.1 of the Investment Agreement provided that the Investment Agreement would (1) form the entire agreement and understanding between the signing parties on the subject matter and (2) supersede all previous oral or written agreements, contracts, understandings and communications of the parties in respect of the subject matter of the agreement.

2.9  In view of the above, I agree with the Board that only little weight should be given to the MOU. In any event, insofar as Mr Barlow seeks to rely on the MOU as part of the relevant factual matrix against which the Investment Agreement should be construed, I am of the view that the terms of the MOU do not materially add to his arguments on what ought to be the proper construction of the terms of the Investment Agreement.

(iii)  The Investment Agreement

2.10  In the Investment Agreement, SSI and its permitted successors and assigns were referred to as the “Investor”.

2.11  Under Recital B, the sole asset of RGAP would be its 100% interest in SRL, the sole assets of which would be its (majority) beneficial equity interest in CJV. As set out at Annex 1 of the 2023 Decision, NHP would have a minority interest in CJV.

2.12  Importantly, Recitals B and C expressly provided that (1) it was CJV which would develop the Project and (2) consistently, RSI and SSI intended CJV to develop the Project.

2.13  Recital C then specifically provided that (1) SSI would subscribe for shares in RGAP and provide certain shareholder loans to RGAP , (2) the shareholders of RGAP would procure SRL to contribute registered capital to CJV; (3) Rockefeller Group would procure its parent company to license the “Rockefeller Group” name to CJV for the Project; (4) Rockefeller Group and/or its affiliates would provide substantial services to facilitate the development of the Project in accordance with the high international standards associated with a Rockefeller Group project.

2.14  Section 2.2 provided for three classes of shares in RGAP (via Series A, B and C)[5], with SSI subscribing for 490 Series B Shares and RSI subscribing for 510 Series A Shares. As noted at 2023 Decision §25, the option granted under the Option Agreement had not been exercised at all material times and therefore no Series C Share was issued.

2.15  Mr Barlow places emphasis on two aspects. 

2.16  As noted above, the first aspect is the existence of the Branding Requirement and the Shareholding Restriction.

2.17  In this regard, Mr Barlow points out that Section 4.1 was specifically included to deal with the Branding Requirement and the Shareholding Restriction. It provided as follows:

“Each Party acknowledges the need to maintain the essential confidentiality of the Project as a result of the history of [Rockefeller Group’s] involvement in the Project. Accordingly, each Party acknowledges and covenants that for purposes of all unrelated third parties, including Government Authorities of Shanghai and NHP, the Project must remain a ‘Rockefeller Group’ project and that RGI shall appear as the ‘public face’ for any aspect of the Project in respect of any communications to or with third parties (except that [SSI] may appear as [Rocekfeller Group’s] local developer partner).”

2.18  Although Section 4.1 was not referred to in the 2023 Decision, as mentioned above, the existence of the Branding Requirement and the Shareholding Restriction was acknowledged by the Board: 2023 Decision §91.

2.19  The second aspect is the fact that the terms of the Investment Agreement empowered SSI to control the Project. For example, Mr Barlow refers to (non-exhaustively) the following provisions:

(1)  Section 2.1.2 established that (1) the Series B Shares (ie SSI’s shares) would have full voting rights at a general meeting and (2) the Series A Shares (ie RSI’s shares) would only have such voting rights as specified in Section 2.8;

(2)  Under Section 2.4.5, unless the Option Agreement was exercised, the presence in person or by proxy of the holders of a majority of Series B Shares (ie SSI) would constitute a quorum for a meeting of the Shareholders;

(3)  Although under Section 2.6.1, the board of RGAP would consist of   directors (4 nominated by the Series A Shareholder and 3 by the Series B Shareholder), under Section 2.6.5, an Executive Committee would be appointed to deal with all corporate matters and day-to-day operations of RGAP. Mr Barlow refers to the evidence of Mr Tang Yu Man Francis (“Mr Tang”), to the effect that SSI was in control of the Executive Committee;

(4)  Under Section 2.7.2, the General Manager of CJV would be a SSI nominee;

(5)  Under Section 7.1.1, all major commercial decisions (except those identified at Sections 7.1.1.1 to 7.1.1.8) regarding the Project would be made by SSI after consultation with Rockefeller Group which required SSI to inform Rockefeller Group of SSI’s intended decision and take into account Rockefeller Group’s suggestions and recommendations (it being acknowledged by the parties that the ultimate decision would nevertheless remain with SSI);

(6)  Under Section 7.1.3, the Shareholders agreed that SSI would be appointed the Project Manager pursuant to a project management agreement.

2.20  The above aspect, namely that the arrangements in the Investment Agreement gave SSI powers to control RGAP (to a large extent), was acknowledged at 2023 Decision §87.

2.21  Specifically in relation to the Sums, by Section 3.1.1 of the Investment Agreement, SSI was required to provide RGAP with funds pursuant to one or more shareholder loans up to US$169 million (“Shareholder Loan”). Section 3.1.1 provided as follows:

“[SSI] shall, subject to Section 2.1.2 and as and when required by [RGAP], provide [RGAP] with funds pursuant to 1 or more shareholder loans with an aggregate face amount no greater than the Investment Amount[6] (each a ‘Shareholder Loan’ and together ‘Shareholder Loans’…. The Shareholder Loan shall bear simple interest at the rate of 20% per annum, payable on the Series B Funding Amount (irrespective of what amount has actually been advanced to [RGAP] and in arrears in accordance of Schedule 2.1.” (emphasis added)

2.22  Schedule 2.1 defined “Series B Funding Amount” as the Investment Amount less Series C Funding Amount. As the Option Agreement had not been exercised, for present purposes, the Series B Funding Amount was the Investment Amount. Schedule 2.1 further defined “Total Funding Amount” as the aggregate of the Series B Funding Amount, the Series A Funding Amount (US$15 million) and the Series C Funding Amount.

2.23  Schedule 2.1 further provided that, except otherwise agreed by the parties, RGAP would distribute all of its distributable cash (“Distributions”) at the end of each fiscal year (“Dividend Payment Date”).

2.24  Importantly, Schedule 2.1 provided that on each Dividend Payment Date, RGAP would make interest payments and other distributions to the Shareholders in a stated order of priority. In the case where, as here, the Option Agreement had not been exercised, the top priority was that RGAP “shall pay any accrued and unpaid interest on the Shareholder Loan”[7] to SSI. Next in priority was a payment to RSI a special dividend of a total aggregate amount of US$6 million. Finally, any remainder would be distributed amongst SSI and RSI in the defined proportions by reference to SSI and RSI’s respective contributions to the Total Funding Amount, namely 169 (SSI): RSI (15): 2023 Decision §86(4).

2.25  Under Section 7.3.8, the Shareholders would procure RGAP to adopt a distributions and shareholder loan repayment policy consistent with Schedule 2.1.

2.26  As found at 2023 Decision §§114 and 122, on 2 December 2005 (ie two days after the date of the Investment Agreement), SSI started to make advancements of the Shareholder Loan to RGAP, which advancements took place in Hong Kong.

(iv)  The Project Management Agreement

2.27  Pursuant to Section 7.1.3 of the Investment Agreement, SSI and CJV entered into the “Project Management Agreement” on 2 January 2006 in Shanghai.

2.28  Recital 2 provided that it was CJV which developed the Project.

2.29  Recital 3 provided that CJV wished to appoint SSI as the project manager.

2.30  Clause 2 provided that SSI, as the project manager, would be entitled to an annual remuneration equivalent to 2% of US$169 million (ie the Investment Amount) until the Project was commercially completed (“Project Management Fees”).

(v)  The Circular and the Board Letter

2.31  In the Circular and the Board Letter, the following representations were , inter alia, made by SWH to the public:

(1)  As consideration for its Series B Shares, SSI paid an amount equal to the par value of 490 Series B Shares (US$1 per Series B Share, being a total of US$490 ). In addition, SSI agreed to make available for RGAP's benefit. as and when required, shareholder loans of up to US$169 million;

(2)  Shareholder loans advanced by SSI would entitle it to simple interest at a rate of 20% per annum on the total Investment Amount (“Shareholder Loan Accrued Interest”), payable in arrears on a date determined by the board of RGAP as soon as practicable after the end of each fiscal year. However, to the extent that RGAP did not have distributable cash available to make such payments, the Shareholder Loan Accrued Interest would accrue on a cumulative basis and would be payable in future years when distributable cash was available;

(3)  A rate of 20% interest payable on shareholder loans made available to RGAP by SSI up to the Investment Amount was considered by the parties to be a fair commercial return to SWH on its investment, taking into account the risks involved including the particular pre-construction, construction, development and other risks of the Project.

3.  The applicable principles

3.1  As noted at §1.5 above, the highlighted words of the Questions inform on the factual and legal parameters of the present appeal. SSI confirms that there is no challenge to the facts agreed by the parties and found by the Board but it seeks to challenge the conclusion reached by the Board.  The applicable principles have been summarized by the Court of Appeal in the recent case of Chapman Development Limited v CIR [2026] 1 HKLRD 826. At §35 thereof, the Court of Appeal observed that the ways in which a decision of the Board may be challenged are limited:

(1)  The decision may be challenged for misdirection in law;

(2)  An inference or the final conclusion of the Board may be attacked on the basis that the primary facts do not admit of an inference drawn from them, or that the primary facts or inferences, or a combination of them, do not admit of the final conclusion. Where the facts can reasonably admit of the Board’s conclusion, however, its decision should not be disturbed;

(3)  A finding of primary fact may be challenged on the basis that there was no evidence in support of the finding. Alternatively, it may be contended that the Board should have made findings of other relevant facts;

(4)  The principles in (2) and (3) above relate to challenges to findings of fact. As further explained in Kwong Mile Services Ltd v Commissioner of Inland Revenue (2004) 7 HKCFAR 275 at §§31-34, findings of fact can be challenged as errors of law only where:

(i)  the decision was based on a finding of fact or inference from the facts which is perverse or irrational;

(ii)  there was no evidence to support the finding; or

(iii)  the decision was made by reference to irrelevant factors or without regard to relevant factors such that the conclusion is contrary to the true and only reasonable one.

(5)  If the fact-finding tribunal’s conclusion is a reasonable one, the appellate court cannot disturb that conclusion even if its own preference is for a contrary conclusion. But if the appellate court regards the contrary conclusion as the only true and reasonable one, the appellate court is duty-bound to substitute the contrary conclusion for the one reached by the fact-finding tribunal.

3.2  Further on at Chapman §§36-38, the following additional observations are set out:

(1)  On an appeal from a decision of the Board, the appellate courts, including the Court of Appeal, are bound by the questions of law on which leave to appeal is granted under section 69. The questions define and limit the scope of the appeal, which an appellate court has no jurisdiction to go beyond. The principles on which an appellate court can intervene as stated in the preceding paragraph are confined by the specific questions on which leave to appeal is granted;

(2)  Further, in considering what is essentially a factual question, the IRO imposes a legal or persuasive burden on the taxpayer. The Board is concerned with a situation where all relevant facts are peculiarly within the knowledge of the taxpayer. The Commissioner has no burden to prove anything, and he does not need the Board to make any positive finding in his favour. If the taxpayer fails to discharge this burden, such as by failing to adduce evidence or if his evidence is disbelieved, the assessment would be upheld and his appeal dismissed;

(3)  The taxpayer would need to show positive findings to prove its contentions. In the absence of this, it has to show that the absence of such findings is due to errors of law made by the Board and which are covered by the questions of law on which leave to appeal was granted.

4.  Overview of the Questions and their correlation with the Agreed Issues

4.1  The Questions’ preamble refers to sections 14 and 15(1)(f) of the IRO.

4.2  Section 14(1) provides:

“Subject to the provisions of this Ordinance, profits tax shall be charged for each year of assessment on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that year from such trade, profession or business (excluding profits arising from the sale of capital assets) as ascertained in accordance with this Part”

4.3  Section 15(1)(f) provides as follows:

“(1) For the purposes of this Ordinance, the sums described in the following paragraphs shall be deemed to be receipts arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong –

…

(f) sums received by or accrued to a corporation carrying on a trade, profession or business in Hong Kong by way of interest derived from Hong Kong; …”

4.4  Mr Barlow submits that section 14 has been authoritatively construed in the following three decisions.

4.5  First, in CIR v Hang Seng Bank Ltd [1991] 1 AC 306, the Privy Council held at 318E-F:

“… Three conditions must be satisfied before a charge to tax can arise under section 14: (1) the taxpayer must carry on a trade, profession or business in Hong Kong; (2) the profits to be charged must be "from such trade, profession or business," which their Lordships construe to mean from the trade, profession or business carried on by the taxpayer in Hong Kong; (3) the profits must be "profits arising in or derived from" Hong Kong. Thus the structure of the section presupposes that the profits of a business carried on in Hong Kong may accrue from different sources, some located within Hong Kong, others overseas. The former are taxable, the latter are not.”

4.6  Secondly, at ING Baring Securities (Hong Kong) Ltd v CIR (2007) 10 HKCFAR 417 §38, the Court of Final Appeal observed as follows:

“In Kwong Mile Services Ltd v Commissioner of Inland Revenue, applying the abovementioned authorities, this Court noted the absence of a universal test but emphasised “the need to grasp the reality of each case, focusing on effective causes without being distracted by antecedent or incidental matters.” The focus is therefore on establishing the geographical location of the taxpayer’s profit-producing transactions themselves as distinct from activities antecedent or incidental to those transactions. Such antecedent activities will often be commercially essential to the operations and profitability of the taxpayer’s business, but they do not provide the legal test for ascertaining the geographical source of profits for the purposes of s.14.”

4.7  Thirdly, at Lee Yee Shing v CIR (2008) 11 HKCFAR 6, the Court of Final Appeal made a number of observations on the meaning of the word “business”. Mr Barlow in particular relies on the words underlined in the following cited paragraphs:

“[68] … Long standing authority supports the proposition that business is a wider term than trade: Doe d Wetherell v. Bird (1834) 2 Ad & E 161 at 166. In American Leaf Blending Co. Sdn Bhd v. Director-General of Inland Revenue (Malaysia) [1979] AC 676 at 684, Lord Diplock said that “‘[b]usiness’ is a wider concept than ‘trade’”. Similarly, in Rangatira Ltd v. Commissioner of Inland Revenue [1997] STC 47, the Judicial Committee of the Privy Council said “that whereas in the United Kingdom legislation the operative word in the charging provisions is ‘trade’, the law of New Zealand, and for that matter the law of Australia, uses the broader word ‘business’”.

[69] What then is the definition or ordinary meaning of “business”? The answer is that there is no definition or ordinary meaning that can be universally applied. Nevertheless, ever since Smith v. Anderson (1880) 15 Ch D 247, common law courts have never doubted that the expression “carrying on” implies a repetition of acts and that, in the expression “carrying on a business”, the series of acts must be such that they constitute a business: Smith v. Anderson (1880) 15 Ch D 247 at 277 – 278 per Brett LJ. Much assistance in this context is also gained from the statement of Richardson J in Calkin v. Commissioner of Inland Revenue [1984] 1 NZLR 440 at 446 where he said “that underlying … the term ‘business’ itself when used in the context of a taxation statute, is the fundamental notion of the exercise of an activity in an organised and coherent way and one which is directed to an end result”. In Rangatira Ltd v. Commissioner of Inland Revenue [1997] STC 47, the Judicial Committee said that it found these words of Richardson J “of assistance” (emphasis added)

4.8  On the principles governing the analysis, within tax cases, of legal relationships and commercial transactions, Mr Barlow relies on WT Ramsay Ltd v IRC [1982] AC 300 at 323G-324B and CIR v Poon Cho Ming John (2019) 22 HKCFAR 344 §§14 and 39 for the propositions that one should not be blinded or confined by labels or formulae which the parties might have adopted and the court’s task is to ascertain the true legal nature of any transaction to which it is sought to attach a tax or tax consequence. In particular, Mr Barlow further relies on Shell Canada Ltd v The Queen [1993] 3 SCR 622 at §§39 and 45 for the propositions that (1) recharacterization is permissible if the label attached by the taxpayer attached by the taxpayer to a particular transaction does not properly reflect its actual legal effect and (2) a taxpayer is entitled to be taxed based on what it actually did, not based on what it could have done.

4.9  As noted at Leave Decision §5.8, it is SSI’s case that:

(1)  Question(a) concerns the Board’s conclusions on Agreed Issues (1) and (4);

(2)  Questions (b) and (c)(i) concern the Board’s conclusion on Agreed Issue (2);

(3)  Question (c)(ii) concern the Board’s conclusion on Agreed Issue (3).

4.10  As will be seen below, it seems to me that how the Questions relate to the Agreed Issues contains overlaps greater than those described by Mr Barlow.

4.11  Before I deal with the Questions individually, I should address two preliminary points which impact a number of them.

4.12  First, Mr Wong argues that, in respect of Question (a) and (c), it is not open to SSI to argue that the Sums were not interest. I do not agree. It seems to me quite plain that the Questions, as formulated, encompass SSI’s argument that the Sums were not interest, on the basis that the Shareholder Loan was in substance SSI’s equity investment.

4.13  Secondly, SSI contends that the Board construed the Investment Agreement, improperly by reference to the Circular, the Board Letter and the labels adopted within SSI's annual accounts. I do not agree. As pointed out by Mr Wong, the Board expressly directed itself not, but referred to such evidence to assess the credibility of Mr Tang's evidence. It is stated at 2023 Decision §92:

“While the Board will not be taking into account SSI or SWH's subjective intent or their post-contract conduct in construing the terms of the Investment Agreement, the Board is entitled to take certain contemporaneous documents into account in assessing the credibility of SSI and SWH's factual contention that it had all along intended the "Investment Amount" to be a capital investment and not repayable as a loan…”

5.  Question (a)

(i)  Overview of SSI’s arguments

5.1  SSI contends that the Board erred in (1) misunderstanding and disregarding the terms and requirements of sections 14 and 15(1)(f) of the IRO and (2) its interpretation of the terms and effect on the Investment Agreement, including by closing its eyes to the contractual context. In doing so, the Board came to conclusions which are irreconcilable with the facts found by them, which, in law, require the following opposition conclusions:

(1)  As a matter of reality, SSI only had one composite business, namely the joint-venture participation in the Project in Shanghai;

(2)  The effective cause of SSI’s contingent future entitlement to be paid the Sums was the development of the Project into saleable or lettable units which, once sold or let, would generate gains or profits that would enable RGAP to make distributions by which the Sums would be paid to SSI;

(3)  The Shareholder Loan was not a loan but was in substance SSI’s equity contribution, and relatedly, as a consequence, the Sums were not interest as SSI’s entitlement to receive them was contingent upon the Project’s post-completion profitability.

(ii)  SSI’s business

5.2  On SSI’s arguments on the nature of its business, I first set out the Board’s findings and conclusions.

5.3  For Agreed Issue (1), namely was SSI a person carrying on business in Hong Kong, the Board concluded at 2023 Decision Section J2 that SSI carried on a business at the material times to participate in the transactions provided in the Investment Agreement, namely to subscribe for the Series B Shares in RGAP and to provide the Shareholder Loan, and that such business was carried on in Hong Kong.  The Board rejected SSI's argument that its business was to develop the Project with RSI.  In particular, the Board agreed with CIR that the focus should be on the acts of SSI, and that whilst the Project was executed in Shanghai, it was done by CJV and not SSI. In particular, the Board observed:

(1)  At 2023 Decision §61: The acquisition of the Series B Shares and the provision of the Shareholder Loan were crucial transactions in the Investment Agreement which could not be brushed aside by SSI as merely “enabling or antecedent”;

(2)  At 2023 Decision §62: Those crucial transactions took place in Hong Kong and RGAP’s subsequent application of the funds from the Shareholder Loan into the Project through SRL and CJV were not the acts of SSI and SSI had wrongly neglected the legal and substantive nature of its investment and the structure of the transactions as set out in the Investment Agreement by describing them as mere antecedent acts;

(3)  At 2023 Decision §63: Applying the principles set out in American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1979] AC 676 at 684C-D, namely a company incorporated for the purpose of making profits for its shareholders any gainful use to which it puts any of its assets prima facie amounts to the carrying on of a business, SSI did carry on a business in that it had advanced its assets to RGAP by way of the Shareholder Loan for gains as provided for at Section 3.1.1 of the Investment Agreement;

(4)  At 2023 Decision §§64-67: The focus should be on the acts of SSI, not those of the other parties to the Investment Agreement, and while SSI occupied certain roles in CJV and acted as the project manager pursuant to the Project Management Agreement, such facts did not alter the fact that CJV, as opposed to SSI, was the entity which owned and developed the Project, as made clear under the terms of Project Management Agreement.

5.4  Also relevant is the Board’s finding on Agreed Issue (3), namely whether the geographical source of the Sums was Hong Kong. At 2023 Decision §§117-121, the Board concluded that:

(1)  When focusing on the Sums themselves, under Section 3.1.1 and Schedule 2.1 of the Investment Agreement, the Sums were interest accrued by reason of SSI making available the funds under Clause 3.1.1 for the use of RGAP which was the profit-generating act;

(2)  SSI had not carried out any activities, whether by itself or through any entity, on the development of the Project to earn the Sums;

(3)  It was CJV that hired SSI to act as the project manager of the Project and not the other way around;

(4)  Any acts done by SSI pursuant to the Project Management Agreement was separately remunerated by the Project Management Fees;

(5)  As accepted by Mr Tang, CJV did not manage the Project on SSI’s behalf or for SSI’s account.

5.5  Mr Barlow argues that the Board had erred in the foregoing conclusions for the following reasons:

(1)  He says that the Board failed to grasp the reality that SSI only had one composite business, namely its joint-venture participation in the Project;

(2)  The Board’s error stemmed from the fact that it incorrectly isolated one aspect of SSI’s overall business (ie the antecedent financing of the Project) from its overall business of property development;

(3)  In relation to (2) above, under Sections 7.1, 7.1.1-7.1.3.8 and Schedule 3.1.5.8, the Project involved multiple facets and transactions, the core ones being acquisition of land titles, obtaining necessary town planning and redevelopment permits, demolition of existing structures, engaging of contractors, supervision of the construction processes, supervision of finishing works and marketing of completed units;

(4)  Under Section 6.2.1.4 of the Investment Agreement, SSI was specifically formed for the purposes of entering into the Investment Agreement and participating in the transactions contemplated therein;

(5)  Under the terms of the MOU and the Investment Agreement, SSI had four important roles, namely as (a) a shareholder, (b) the Project’s financier, (c) the Project’s executive decision maker for commercial decisions and (D) the project manager of the Project’s works.

5.6  As pointed out by Mr Wong, for the purpose of the present appeal, SSI must establish that the only true and reasonable conclusion is that SSI only had one composite business, which was to develop the Project in Shanghai. For the following reasons, I am of the view that SSI has failed to do so:

(1)  I do not agree with Mr Barlow’s submission that the Board had incorrectly isolated the SSI’s financing of the Project (which he says was antecedent) from the overall business of property development. In my view, the Board’s approach in (a) identifying the respective roles of the entities under the terms of the Investment Agreement, and (b) in particular differentiating the multiple roles of SSI in the Project as set out under the Investment Agreement is the correct approach adumbrated in the case authorities;

(2)  Insofar as Mr Barlow relies on Sections 7.1, 7.1.1-7.1.3.8, it is plain that all the tasks enumerated under Section 7.1.3 (7.1.3.1-7.1.3.8) were to be performed by SSI as the project manager under the Project Management Agreement, for which it was separately enumerated by the Project Management Fees. As regards Schedule 3.1.5.8, it set out a number of statements relating to the Project, and insofar as any entities or activities are specifically named therein, SSI is not specifically mentioned. Conversely, it appears clear from paragraph 7 thereof that the Relocation Contract with NHP was to be executed by CJV (or SRL on behalf of CJV), underscoring that it was CJV which was responsible for the development of the Project;

(3)  It is pertinent to note that, as recorded at 2023 Decision §30, the Determination accepted that the Project Management Fee was not chargeable for profits tax;

(4)  In any event, the fact that the arrangements under the Investment Agreement granted SSI powers to control RGAP was not overlooked by the Board, but the Board did not regard it to be material given the express terms set out at Section 3.1.1 (recited at §2.21 above);

(5)  I agree with Mr Wong that, given the clear delineation of the different roles of the different entities set out in the Investment Agreement, the principles in Ramsay, Poon Cho Ming and Shell Canada (all of which were cited by the Board at 2023 Decision §73) are in fact against SSI’s submissions. As noted by the Board, Shell Canada is an authority of the following propositions:

“[39] This Court has repeatedly held that courts must be sensitive to the economic realities of a particular transaction, rather than being bound to what first appears to be its legal form… But there are at least two caveats to this rule. First, this Court has never held that the economic realities of a situation can be used to recharacterize a taxpayer’s bona fide legal relationships. To the contrary, we have held that, absent a specific provision of the Act to the contrary or a finding that they are a sham, the taxpayer’s legal relationships must be respected in tax cases. Recharacterization is only permissible if the label attached by the taxpayer to the particular transaction does not properly reflect its legal effect… Second, it is well established in this Court’s tax jurisprudence that a searching inquiry for either the “economic realities” of a particular transaction or the general object and spirit of the provision at issue can never supplant a court’s duty to apply an unambiguous provision of the Act to a taxpayer’s transaction. Where the provision at issue is clear and unambiguous, its terms must simply be applied.” (emphasis added)

5.7  For completeness, I deal with a further point raised by Mr Barlow.

5.8  First, insofar as Mr Barlow suggests that a single act of making a loan cannot constitute the carrying on of a business, I disagree. The Board at 2023 Decision cited Lee Yee Shing and was plainly aware that, ordinarily, a series of act would not constitute a business unless they are continuous and repetitive and done for the purpose of making a gain or profit. I accept Mr Wong’s submissions that each case must turn on its facts. Here, the Board found that SSI carried on business in the Relevant Years, such business being the two key activities which SSI would carry out for the purpose of making gain/profit, namely subscription for the Series B Shares in RGAP and the provision for the Shareholder Loan. Hang Seng Bank at 323B observes that lending money is plainly an example where a profit-making company can earn income from exploiting its assets. Further Touax Container Investment v CIR [2024] HKCFI 2242 at §35 is an authority for the proposition that not much activity is necessary to constitute the carrying on of business.

5.9  For all the above reasons, I am of the view that SSI has failed to demonstrate that, as a matter of reality, SSI only had one composite business, namely the joint-venture participation in the Project in Shanghai is the only true and reasonable conclusion.

(iii)  Effective cause

5.10  Mr Barlow contends that the 2023 Decision failed to grasp the reality that the effective cause of SSI’s contingent future entitlement to be paid the Sums was the development of the Project into saleable or lettable finished units which, once sold or let, would generate the gains or profits that would enable RGAP to make the Distributions by which the Sums would be paid to SSI.

5.11  I am unable to accept Mr Barlow’s submissions.

5.12  As pointed out by Mr Wong, a taxpayer does not necessarily have one indivisible business whose location is the source of all his profits. As explained in Patrick Cox Asia Ltd v CIR [2024] 5 HKLRD 330 §20:

“In the seminal case of Commissioner of Inland Revenue v Hang Seng Bank Ltd [1991] 1 AC 306, profits accrued to the taxpayer bank from the purchase and resale outside Hong Kong of certificates of deposit. In considering whether such profits were chargeable to tax under s.14, the Privy Council rejected the contention that the business run by the bank in Hong Kong should be treated as one and indivisible and that the profits from the overseas trading in certificates of deposit were mere components of the profits of an entire business in Hong Kong. It was held that the structure of s.14 presupposes that the profits of a business carried on in Hong Kong may accrue from different sources, some located within Hong Kong, others overseas. A distinction falls to be made between profits arising in or derived from Hong Kong and those outside Hong Kong according to the nature of the different transactions by which the profits were generated…” (emphasis added)

5.13  In a similar vein, ING observes that the focus is on establishing the geographical location of the tax-payer’s profit-producing transactions themselves as distinct from activities antecedent or incidental to those transactions. Dealing with the facts of that case, Ribeiro PJ said at §42:

“I will return later in this judgment to examine the evidence as to the nature of the transactions that gave rise to the disputed profits. But, I should say at once that in my view, the authorities discussed above clearly establish in principle that where a broker carrying on business in Hong Kong receives profits in the form of commission or analogous income earned only upon the successful execution of a securities transaction he has caused to be effected on his client’s behalf in a securities market outside Hong Kong, it is that offshore trading transaction which ought to be regarded as the relevant profit-generating transaction on his part so that the resultant profits should not be regarded as arising in or derived from Hong Kong.”

5.14  Further on at ING §§133-134, it is stated that one must focus on the activities of the taxpayer and not those of other group companies.

5.15  In the present case, the Board found that (1) the Shareholder Loan was advanced in Hong Kong, (2) under the terms of the Investment Agreement, RGAP’s obligation to pay interest to SSI commenced from the date of the Investment Agreement (2023 Decision §97), and (3) importantly, as noted above, the redevelopment envisaged under the Project was carried out by CJV, not SSI.

5.16  It is therefore the case that the Board found that the Sums were earned by the advancement of the Shareholder Loan in Hong Kong and the redevelopment activities were either conducted by other entities on their own behalves or by SSI for the purpose of earing the Project Management Fees (but not the Sums).

5.17  In characterizing the effective cause as being the redevelopment envisaged under the Project, Mr Barlow’s submission has erroneously considered that SSI could only have one indivisible business, wrongly focused on the activities of the other entities and failed to distinguish between SSI’s own multiple roles under the Investment Agreement. Indeed, at 2023 Decision §§116, in dealing with Agreed Issue (3), the Board pointed out that one must not conflate SSI’s act of earning the Sums with the source of payment of the Sums. Mr Barlow has failed to persuade me that the conclusion which he contends for is the only true and reasonable conclusion.

5.18  Insofar as necessary, I also rely on my analysis set out in the subsection immediately following on the nature of the Sums.

(iv)  The nature of the Sums: interest or return on capital

5.19  On Agreed Issue (2), namely were the Sums accrued to SSI by way of interest, the Board’s finding and conclusions (as summarized by Mr Wong) were as follows:

(1)  The focus of the issue was whether SSI could discharge its burden of showing that the Sums were not interest under section 15(1)(f) of the IRO. SSI raised three alternative arguments for why they were not, namely: (a) on a proper construction of the Investment Agreement, the Shareholder Loan was pure capital investment by SSI into the Project and the Sums were not interest; (b) even if it was a loan, it was in the nature of an investment and hence the Sums were a "return on the investment" and not interest; and (c) the Sums were not interest because they arose from a pure contractual right to accrue (2023 Decision §74);

(2)  It was common ground between the parties that the proper approach was to focus on the substantive legal effect and the consequence of the transaction in the Investment Agreement, including the legal rights and obligations of SSI. The Board by reference to Ramsay, Shell Canada and Poon Cho Ming, adopted the approach that it should take into account the factual circumstances of the case, interpret and understand the relevant legal documents and the terms therein in a realistic manner to ascertain the true legal substance of the transaction (2023 Decision §§70-73);

(3)  Rejecting SSI's first argument, the Board concluded that, as a matter of proper construction of the Investment Agreement and considering all relevant circumstances, the Shareholder Loan was a loan (2023 Decision §§76-93);

(4)  Rejecting SSI's second and third arguments, applying authorities which identified various characteristics that were indicia of interest, the Board found that all indicia were met and that the Sums constituted "interest" for the purpose of section 15(1)(f) of the IRO. Specifically, the Board found that the Sums to be the return or compensation payable to SSI for making available sums up to the amount of Shareholder Loan for the use of RGAP, and that RGAP's obligation to pay interest to SSI started to accrue from the date of the Investment Agreement (2023 Decision §§95-104);

(5)  The Board further found as a fact at 2023 Decision §101 that (1) it was SSI's own commercial decision based on its assessment of risks which prompted it to have agreed that the actual payment of the accrued interest would only take place when RGAP became profitable, and (2) the arrangement (including the interest rate of 20% per annum) was considered by SWH to be a fair commercial return on its investment, taking into account the risks involved, including the risk of the Project.

5.20  In support of SSI’s contentions that (1) the Shareholder Loan was in substance SSI’s capital investment and (2) the Sums were in substance return on investment and not interest, Mr Barlow advances the following contentions:

(1)  Whilst SSI contributed the Investment Amount in the form of the Shareholder Loan, such labelling was to comply with the Branding Requirement and the Shareholding Restriction;

(2)  Neither the MOU nor the Investment Agreement contained any provision for (i) the periodic payment of annual interest, (ii) any loan security or (iii) the repayment of the Investment Amount as per Section 2.4.6 of the Investment Agreement;

(3)  The interest provided for in Schedule 2.1 of the Investment Agreement was contingent upon the Project’s post-completion profitability;

(4)  SSI’s entitlement was proportionate to its relative contribution to Total Funding Amount which was a defining characteristic of dividend entitlements;

(5)  Under Section 3.1.1 of the Investment Agreement, the interest entitlement would begin to accrue irrespective of how much was in fact advanced to RGAP, which entitlement could not be the return or consideration or compensation for the use or retention by RGAP of a sum of SSI’s money: Re Euro Hotel (Belgravia) Ltd [1975] STC 682 at 691a-f;

(6)  Unless Rockefeller Group exercised its option clause Section 2.4.2 of the Investment Agreement, RGAP would become a subsidiary of SSI at no cost to SSI.

5.21  As regards Mr Barlow’s first argument, the Branding Requirement and the Shareholding Restriction were dealt with at 2023 Decision §91 as follows:

“Even taking into account the “Branding Requirement" and the “Shareholding Restriction”… they do not necessarily mean that the “Investment Amount" must be a capital investment. The above are only background matters leading to SSI agreeing to the transactions as set out in the Investment Agreement. One ultimately needs to go back to the express terms of the Investment Agreement to ascertain the nature of the transactions which SSI and the other signing parties agreed to enter into with the Branding Requirement and the Shareholder Requirement in mind. As we have explained above, properly construed, SSI had agreed to provide the funds under Clause 3.1.1 of the Investment Agreement by way of loan(s). It follows that SSI had to bear the legal consequences, including tax consequences, arising from such a decision.”

5.22  Indeed, at 2023 Decision §§86-87, the Board explained why Section 3.1.1 and Schedule 2.1 of the Investment Agreement did not assist SSI to show that the Shareholder Loan was in substance not a loan:

(1)  According to Clause 3.1.1, interest at a rate of 20% would accrue on an annual basis, giving SSI a fixed return each year. Such a fixed return was not common for ordinary equity shareholders as they would not be entitled to any guaranteed return for their investment but would rather obtain a return only when dividends were declared by the company;

(2)  Under Clause 2(a)(i) of Schedule 2.1, SSI would have priority to the payment of its accrued but unpaid interest. The payment under Clause 2(a)(i) was not part of the profit-sharing arrangement with RGAP, as it was the sum payable to SSI to settle the accrued interest for the Shareholder Loan under Clause 3.1.1;

(3)  Under Clause 2(a)(ii) of Schedule 2.1, RSI would be entitled to a special dividend in an aggregate amount of US$6 million;

(4)  It was only after the amounts referred to above were paid that any remainder would be distributed amongst SSI and RSI in the stated proportion by reference to their respective contributions to the Total Funding Amount. Therefore, it was incorrect for SSI to say that the sharing of the distribution between it and RSI was always proportional to the amount put in by the two parties;

(5)  As to the arrangements in the Investment Agreement giving SSI powers to control RGAP, this was neither here nor there. Whether and how much control SSI had over RGAP did not impact upon the nature of the Investment Amount, which the parties expressly provided to be a loan in Clause 3.1.1.

5.23  I repeat the propositions in Shell Canada set out at §5.6(5) above. I agree with the Board that the terms of the Investment Agreement are clear. As pointed out by Mr Wong, and as confirmed by Mr Barlow, it is not SSI’s case that the Investment Agreement was a sham. I agree with Mr Wong’s following submissions: (1) the fact that SSI could only participate in the Project if it did not structure its investment as an equity investment reinforces CIR’s case that SSI had for good commercial reasons deliberately chosen to enter into the Investment Agreement by which entailed the advancing of the Shareholder Loan and (2) even assuming the parties intended SSI’s investment to bear some similarities to an equity investment, it is not sufficient to recharacterize the plain and clear terms of the Investment Agreement, especially when, as will be seen below, the features of the Shareholder Loan under the Investment Agreement bear all indica that the Sums were interest.

5.24  As regards Mr Barlow’s second, third and fourth arguments:

(1)  The fact that there was no provision for the periodic payment of annual interest does not mean that the Sums were not interest. As noted at 2023 Decision §100, Chevron Petroleum (UK) Ltd v BP Petroleum Development Ltd [1981] STC 689 at 696f-g is an authority for the following propositions: the fact that the actual payment of the accrued interest may be deferred or that the actual payment of the interest is dependent on contingencies does not change the nature of the sum being an interest. Therefore, as found at 2023 Decision 2023 §101, SSI’s argument that the accrued interest would only be paid by RGAP when it had distributable cash according to Schedule 2.1 of the Investment Agreement and in arrears would not render the Sums not interest;

(2)  The fact that there was no provision for loan security also does not mean that the Shareholder Loan was not a loan. As observed at 2023 Decision §88, such a provision is only a commercial term which may or may not be included and its absence does not necessarily displace the fundamental characteristics of a loan;

(3)  As to the argument that the Shareholder Loan was not repayable, Mr Barlow relies on Section 2.4.6 of the Investment Agreement. Section 2.4.6 only deals with surplus assets in cases where there would be a return of assets of RGAP on a liquidation, reduction of capital or otherwise and provides that the surplus assets would be shared amongst the Shareholders in the proportions of funds contributed by them to the Total Funding Amount. In my view, Section 2.4.6 does not have the effecting of stipulating that the Shareholder Loan was not repayable. As noted at 2023 Decision §84, the fact that there was no express provision stating when the Shareholder Loan was to be repaid does not alter its nature of being a loan, and as a matter of law, it is well established that where money is lent without expressly stating the time of repayment, a present debt is created which is generally repayable at once, or by implication in appropriate cases, repayable on demand. In any event, as pointed out by Mr Wong, according to the terms of the Investment Agreement, upon liquidation, the Shareholder Loan is a provable debt ranking ahead of equity.

5.25  As regards Mr Barlow’s fifth argument, he relies on the above-identified passage in Euro for the proposition that interest is, in general terms, “the return or consideration or compensation for the use of retention by one person of a sum of money, belong to, in a colloquial sense, or owed to another”. He argues that, as SSI’s entitlement under Section 3.1.1 would begin to accrue from 1 December 2005 irrespective of how much was in fact advanced to RGAP, the Sums had accrued by reason of a pure contractual right and would therefore not meet the criteria set out in Euro.

5.26  As I understand the position, Mr Barlow’s argument is a repetition of the contractual accrual argument which the Board dealt with at 2023 Decision §§95-99:

(1)  At 2023 Decision §96: The Board observed that the authorities suggest that while there are no universal definitions or criteria which have to be me, the indicia that a sum amounts to “interest” are: (a) the definition set out in Euro, (2) there must be a sum of money by reference to which the payment of interest is to be ascertained and (3) the sum of money must be a sum that is due to the person entitled to the interest;

(2)  At 2023 Decision §§97-98: The Board rejected SSI’s contractual accrual argument since SSI’s obligation was to make available the Shareholder Loan for the use of RGAP since the signing of the Investment Agreement, the interest accrued under Section 3.1.1 was a return/compensation to, SSI for having the Shareholder Loan in place for the use by RGAP since day one of the Investment Agreement;

(3)  At 2023 Decision §99: the Board found that the second and third indicia were also met given the express terms of Section 3.1.1.

5.27  At 2023 Decision §114, the Board observed that SSI could not stretch the phrase “irrespective of what amount has actually been advanced” in Section 3.1.1 too far, since the phrase only stated that interest would be accrued irrespective of how much had actually been advanced and did not stipulate that interest would be accrued even if SSI did not make any advance at all. As a matter of fact, SSI started to make advancement to RGAP since 2 December 2025, two days after the signing of the Investment Agreement.

5.28  I agree with the Board’s analysis. Indeed, apart from recycling the argument ran before the Board, Mr Barlow in his written submissions has not engaged the Board’s analysis and has not identified how it is said that the Board had erred in its analysis.

5.29  As regards Mr Barlow’s sixth argument, Section 2.4.2 provides as follows:

“In the event that [Rockefeller Group] fails to exercise the Option to subscribe for such number of Series C Shares prior to the expiration of the Option Agreement, or if it exercises the Option but for a number of Series C Shares amounting to less than 50% of the outstanding share capital of [RGAP] (without regard to Series A Shares), [Rockefeller Group] will at the request of [SSI] transfer such number of Series A Shares to [SSI] sufficient to enable [SSI] to consolidate [RGAP] as a subsidiary of [SSI] in the financial results of [SSI] under the applicable general accounting principles in Hong Kong. Such a transfer should be made without cost to [SSI] and shall not alter the right or obligations of [Rockefeller Group] under … this Agreement.”

5.30  In his written submissions, Mr Barlow argues that Section 2.4.2 has the effect that, unless Rockefeller Group exercised the option, RGAP would become a subsidiary of SSI at no cost to SSI.

5.31  With all due respect to Mr Barlow, he has beguilingly overstated that the effect of the clause. The clause requires Rockefeller Group to transfer sufficient number of Series A Shares to enable SSI to treat RGAP as a subsidiary under the Hong Kong accounting principles and expressly provides that such transfer would not alter the right or obligation of Rockefeller Group under the Investment Agreement.

5.32  In my view, the reliance on Section 2.4.2 does not add to the analysis.

5.33  For completeness, generally in respect of Question 1, Mr Barlow relies on AW Walker & Co v IRC [1920] 3 KB 648 at 653 in support of the overarching contention that the Sums were not an entitlement to loan interest. In that case, there were two sums payable to the lender, Sum A (300l) and Sum B (200l). The question raised was whether Sum A could be deducted in arriving at the profits. Sum B was by contract expressly regarded as interest and Sum A regarded as a share of the profits. At page 653, it was held:

“… The persons who lent this money receive interest on the money lent which is payable to them as a debt, and for that purpose it is immaterial whether the business prospers or languishes, they also receive a share of what the business erns. That is not interest; it is simply a share of the profits. If there are profits they receive a share of them, if there are no profits they do not receive anything. The sum of 300l is simply what it is called in the agreement – a share of the profits.”

5.34  I agree with Mr Wong that SSI can derive no assistance from AW Walker. The facts of the present case are miles apart from that case, not least because, unlike AW Walker, the express terms of the Investment Agreement in fact had the effect of classifying the Sums as SSI’s entitlement to interest.

5.35  For all the above reasons, I reject SSI’s appeal premised on Question (a).

6.  Question (b)

6.1  Question (b) complains that the Board had failed to adopt and apply the core principles set out at Nice Cheer §40, namely that profits are not taxable until they are realized and that profits must not be anticipated.

6.2  CIR opposes Question (b) on two bases. First, Mr Wong submits that the Question (b) is not open to SSI as whether certain profits have or have not been earned (and therefore is or is not anticipated) is a fact-sensitive question not run before the Board. Secondly, even were SSI allowed to run the argument, it should be rejected on the merits.

6.3  I refer to Leave Decision Section 7 on my then observations as to whether SSI did or did not take the Nice Cheer point before the Board. At §§7.4-7.5, I stated that on the then materials, I was unable to come a concluded view.

6.4  I have now been provided with additional materials by CIR which included, inter alia, the parties’ closing submissions and the transcript of the oral closing. Mr Barlow objects to their inclusion, relying on Practice Direction 34. I do not agree with Mr Barlow for the following reasons:

(1)  Procedurally, I do not see how Practice Direction 34 is relevant and Mr Barlow has not referred to any specific paragraph(s) therein which support his argument that the inclusion of this new material is not permissible. Insofar as he relies on paragraph 3 which requires documents to be exhibited in an affidavit, that paragraph is only directed at the applicant for leave to appeal;

(2)  Substantively, it seems to me, where the issue of whether the Nice Cheer point was in fact run by SSI before the Board has expressly been raised at CIR’s Statement of Grounds §§31 and 34, it is only just the court should be provided with and consider the materials on how the case was conducted before the Board, which materials cannot conceivably give rise to any prejudice to SSI.

6.5  Having considered the materials referred to by Mr Wong, it is plain that SSI had conducted its case before the Board on the bases that (1) the Sums had accrued and were earned but would be paid later, not only for accounting purpose but also for tax purposes and (2) any reference to the Sums being anticipated profits was in relation to SSI’s argument that the Sums were sourced offshore: CIR’s Skeleton Submissions §111.

6.6  As has been pointed out at Leave Decision §8.2(4), to withdraw from a concession of fact, SSI has the burden of showing that the previous foregone point should be raised. It will be harder to raise a point that has been expressly conceded. If taking the point would risk causing prejudice to the other party, in the sense that it might have been deprived of the opportunity of dealing with the case differently in the tribunal below, then it is unlikely that the resiling will be allowed. The greater the risk, the less likely it is that it will be allowed. There is a low threshold of risk for these purposes. The burden of establishing no risk is on the party who wishes to withdraw the concession, and the other party should have the benefit of any doubt in this area: Chan Chi Wai v Chan Sau Wah [2019] 3 HKLRD 330 at §29.

6.7  In the present case, I am of the view that SSI should not be permitted to run the Nice Cheer point for the following reasons:

(1)  Insofar as Mr Barlow suggests that the Nice Cheer point is a pure question of law, I disagree with him. His reliance on Nice Cheer §§15 and 42 is misplaced, as those passages simply state that whether a disputed amount represents an assessable profit is a question of law. As noted at Leave Decision §8.3, whether interest has accrued within the meaning of section 15(1)(f) depends on the facts of each case;

(2)  The foregoing view is further supported by the authorities referred to by Mr Wong, namely Issac Holden & Sons Ltd v The Commissioners of Inland Revenue (1924) 12 TC 768 and Gardner, Mountain and D’Ambrumenil, Ltd v Inland Revenue Commissioners [1911] 1 ALL ER 650 which establish that whether a profit is realized or not is a question of fact which essentially involves asking whether the profits were earned or accrued in the tax year;

(3)  The above two cases recognize the distinction between, (a) the realization/earning/accrual of profit and (b) the profit being payable/paid. As stated at Gardner page 666G, profits, though not payable nor receivable until a later year, should be brought into the accounts for the year in which they are earned;

(4)  In the present case, Mr Tang’s evidence before the Board was that “interest on the Shareholder Loan began to accrue from the date of the Investment Agreement itself” and described the return to SSI for having made available the Shareholder Loan as “the 20% accruing annually”;

(5)  It seems to me plain that, were SSI permitted to run the Nice Cheer point, prejudice would be caused to CIR. Had the Nice Cheer Point been run, CIR would have cross-examined Mr Tang on the discrepancies between the new contention (that the Sums were not accrued) and his own evidence (that the Sums were accrued).

6.8  In any event, even were SSI allowed to run the Nice Cheer point, SSI has failed to point to some findings by the Board hat the Sums were anticipated profits.

6.9  In this regard, Mr Barlow relies on 2023 Decision §117-118:

“[117] With respect to the first conflation, one only needs to go back to Clause 3.1.1 and Schedule 2.1 of the Investment Agreement to understand the parties’ respective rights and obligations properly. As we have explained above, the Sums are interest accrued by reason of SSI making available the funds under Clause 3.1.1 for the use of RGAP. This is the profit-generating act, the act which resulted in the accrual of the Sums. As to the anticipated profit from the Project, it is the money or the source of which RGAP would resort to in settlement in of the interest which has already accrued to SSL. This is made clear by Clause 2 of Schedule [2.1], which expressly states that “On each Dividend Payment Date, [RGAP, not SSI] shall make interest payments and other distributions to Shareholders in the following order of priority”. Further, Clause 2(a)(i) provide that to paragraph 3, [RGAP] shall pay any accrued and unpaid interest on the Shareholder Loan to the Series B Shareholder.

[118] This is reinforced by the fact that SSI itself prepared its account on an accrual basis. The Sums were profits which arose in the Relevant Years of Assessment they were earned, irrespective of whether SSI had been paid by RGAP the Sums… “

6.10  He submits that the underlined sentences should be read as the Board having found that (1) the Sums were anticipated profit because the Sum were profits which arose in the Relevant Years irrespective of whether SSI had actually been paid the Sums (“1^st Finding”) because it was the anticipated profit from the Project which would be the source of payment (“Alleged 2^nd Finding”).

6.11  I am unable to accept Mr Barlow’s submissions.

6.12  It is true that the Board made the 1^st Finding which is entirely consistent with the principles set out in Gardner. However, the Alleged 2^nd Finding is a misreading of the 2023 Decision. When read together with 2023 Decision §111(2), it is plain that by 2023 Decision §§116-117, the Board rejected SSI’s argument that the Sums were anticipated profits from the offshore Project. In my view, the Board plainly never concluded that the Sums were the anticipated profits from the Project but only that the future profits from the Project were the source of the moneys used to pay the Sums.

6.13  I therefore agree with Mr Wong that the Board did not fail to adopt and apply the principles that that profits are not taxable until they are realized and that profits must not be anticipated as posited by Question (b).

6.14  It bears emphasis that the argument made by Mr Barlow in this appeal is that the Board had made a finding that the Sums were anticipated profits which, for the reasons set out above, it did not. Insofar as Mr Barlow refers to the other points set out at SSI’s Statement of Grounds (“AS”) §§59-61, I reject them for the reasons already set out at Leave Decision §§7.8-7.13.

6.15  For the above reasons, I reject the appeal premised on Question (b).

7.  Question (c)(i)

7.1  The central premise of Question (c)(i) is that there is a legal principle that interest is not accrued (as distinct from “accruing”) unless and until the creditor has a present enforceable right to payment of the interest. Mr Barlow says that the foregoing principle may be derived from the cases cited at AS §63.

7.2  Mr Barlow refers to Director of Public Works v Ho Po Sang [1961] AC 901, Aitken v South Hams District Council [1995] 1 AC 262 and Hinckley UDC v West Midlands Gas Board [1951] 1 Ch 577.  As pointed out by Mr Wong, Ho Po Sang case only stands for the proposition that mere hope does not constitute an accrued right and Aitken and Hinckley are to the same effect.

7.3  As regards Re Ganong, Ganong v Belyea et al [1941] DLR 455 (SCC), Mr Barlow relies on it for the proposition that a preferential dividend at a fixed rate may be said to be accruing from day to day, but the shareholders acquire no right to payment of any dividends until there are net profits and until such time as the directors determine they shall be paid. I agree with Mr Wong that it is of limited value because, in view of the issues already dealt with above, the case does not say that the dividends would not have accrued if the shareholders had acquired a right to receive dividends which were only payable some time in the future.

7.4  Mr Barlow relies on PRA Group (UK) Ltd v Doyle [2019] 1 WLR 3783 for the proposition that the date when a cause of action accrues may be said to be the date on which the plaintiff would be able to issue a statement of claim capable to stating every existing fact which, if traversed, it would be necessary for the plaintiff to prove in order to support bis right to judgment. As observed by Mr Wong, the foregoing turns on the specific meaning of the phrase “cause of action” and is obviously distinguishable.

7.5  Finally, Mr Barlow relies on Ecclesiastical Commissioners of England v Treemer [1893] 1 Ch166. As pointed out by Mr Wong, this case is concerned with adverse possession and the issues were when time started to run against the paper owners and the operation of the limitation statute., specifically, when the paper owners could in fact exercise their right to recover possession. I agree with Mr Wong that it provides no support to SSI.

7.6  With all due respect to Mr Barlow, the cases cited at AS §63 are at most of peripheral relevance. The pertinent case is Forlee v CIR (No 2) [2022] 6 HKC 47 where the Court of Appeal dealt with the word “accrue”:

“[47] The words “accruing”, “accrues” and “has accrued” as used in these sections are not defined in the Ordinance. We have been referred to the English commercial case of Tael One Partners Ltd v Morgan Stanley & Co International plc [2012] EWHC 1858 (Comm), where the question arose as to whether certain payment premium payable by the borrower had accrued by a certain date under the loan facility documentation in question. At first instance Popplewell J said:[42]

‘The natural meaning of a fee which has accrued by a certain date is that it comprises a vested right to a sum which is ascertained, or ascertainable by reference to past events. It includes a right to an ascertained, or ascertainable, sum where the payment obligation itself is deferred to a particular date in the future (as was the case with the interest provision in the Facility Agreement). It also extends, in my view, to a sum which will undoubtedly be payable at a future date, but the time for payment of which is uncertain. … But a fee cannot be said to have accrued if the existence of the right to payment is contingent upon the occurrence of an uncertain future event, as distinct from the time at which it may be enforced. This is just as much so if the uncertain future event affects the amount of any payment obligation as it is if the uncertainty affects the existence of any obligation at all. Accrual is concerned with the vesting of rights, albeit that it can include those which are not immediately enforceable.’

[48] When the case reached the UK Supreme Court, Lord Reed, with whom the other members of the court agreed, said:[43]

‘The word ‘accrue’ is generally used to describe the coming into being of a right or an obligation (as, for example, in Aitken v South Hams District Council [1995] 1 AC 262), so that the person in question then has an accrued right, or is subject to an accrued liability, as the case may be. That is the meaning which accrual usually bears, in particular, in relation to interest and other payments. The amount to which there is an entitlement may not be payable until a future date, but an entitlement may nevertheless have accrued. …’ ” (emphasis added)

7.7  Forlee is directly against the proposition posed in Question (c)(ii). As noted in Forlee, interest may have accrued even if it is not payable until a future date. If a sum of interest is not payable at until a future date, it seems to me obvious that the lender would not have acquired a presently enforceable right, but as noted at Forlee, the entitlement may nevertheless have accured.

7.8  For the above reasons, I reject the appeal premised on Question (c)(i).

8.  Question (c)(ii)

8.1  Question (c)(ii) is directed at whether the Sums were derived from Hong Kong.

8.2  Agreed Issue (3) deals with the question whether the geographical source of the Sums Hong Kong for the purpose of section 15(1)(f) of the IRO. As summarized by Mr Wong (and as has already been noted above):

(1)  The Board found that (i) the profit-producing activity that earned SSI the Sums was the advancement of the Shareholder Loan by SSI to RGAP, which was done in Hong Kong, and (ii) even taking into account SWH's provision of the funds to SSI before they were lent to RGAP, the provision of such funds was also done in Hong Kong;

(2)  The Board rejected SSI's arguments that (i) the negotiation and signing of the Investment Agreement were the profit-producing activities, finding such acts to be at most antecedent; and (ii) the Sums were the anticipated profit from the Project;

(3)  In particular, the Board found that (i) SSI did not carry out any activities, whether by itself or through any entity, on the development of the Project to earn the Sums; and (ii) it was CJV that developed the Project, and the activities of CJV were carried out on its own behalf.

8.3  Mr Barlow argues that the Sums were not derived from Hong Kong because it was derived pursuant to the Investment Agreement which (1) was executed in Shanghai, (2) governed the construction of the Project and (3) made SSI’s future entitlement contingent upon SSI delivering substantial performance of its contractual commitments in Shanghai.

8.4  As regards (2) and (3) above, they have already been dealt with in the above analysis.

8.5  That leaves (1) above which the Board regarded as an “artificial” argument (2023 Decision §111(1)). I agree with the Board’s analysis set out at 2023 Decision §113:

“First, SSI's negotiation and mere signing of the Investment Agreement could not have been the profit generating act. As we have analysed in Section J above, the Sums were accrued as a result of SSI making available for the use of RGAP the “Investment Amount”/Shareholder Loan since the date when the Investment Agreement was entered into. It is against practical reality for SSI to suggest that by merely appending its signature on the Investment Agreement, without mote, it would be entitled to the Sums. At the most, SSI's negotiation and signing of the Investment Agreement amount to antecedent acts.”

8.6  I reject the appeal premised on Question (c)(ii).

9.  Conclusion

9.1  For all the above reasons, the appeal is dismissed.

9.2  I further make a costs order nisi that SSI do pay to CIR the costs of the appeal, to be taxed if not agreed with a certificate for 2 counsel.