1) SUB-B is providing agency services outside Hong Kong

Hong Kong tax rules do not impose withholding tax on payments to non-residents in
general. The management fee is not deductible from taxable profits if SUB-A is
earning HK source income (thus subject to HK profits tax). The management fee is
deductible under the following situations: (i) the provision of management services is
incurred in relation to the production of Hong Kong source income. See section 16 of
the Inland Revenue Ordinance; and (ii) SUB-A is earning non-Hong Kong source
income. Where the activities from which the profits arise take place outside Hong
Kong, the profits are sourced from outside Hong Kong.

However, if the management services are provided in Hong Kong, then the recipient
of the management fee will be liable to HK profits tax. [In practice, the HK tax
authority will not allow the deduction by Sub-B. The HK Co is not required to
withhold the tax at source.] Whether the provision of management services attracts
Hong Kong tax liabilities is independent of the fact that Sub-B is earning non-Hong
Kong source profits. The key point is that one looks to see what the taxpayer has done
to earn the profit in question and where he has done it. See Commissioner of Inland
Revenue v. Hang Seng Bank Ltd. [1991]

2) SUB-A is selling properties located in China

Since the Company's activities for the sale of PRC property are performed outside
Hong Kong, SUB-A is earning non-HK source profits and not liable to HK tax. The
management fee is deductible from or charged to taxable income or profits, without
any HK tax implications. Note that if the management services are provided in HK,
the recipient who delivers the services is liable to Hong Kong tax.

In general, the HK tax rule looks at whether the employee has entered into
employment contract with the HK Company. If yes, the employee is liable to HK
salaries tax irrespective of where he works and where he receives the payment. The
employee could be exempted from salaries tax under the following two situations: (i)
he has suffered and paid income tax outside Hong Kong. Section 8(1A) (c) of the
Inland Revenue Ordinance (the IRO) refers; and (ii) he works outside Hong Kong for
the whole of the fiscal year, except that he visits Hong Kong for less than 60 days in
the tax year. See section 8(1A) (b) of the IRO.

The director is a holder of office. The Hong Kong tax rule makes a difference
between director’s fee and salary income. The director is liable to Hong Kong salaries
tax even if he stays outside Hong Kong for the whole of the fiscal year. This is so
irrespective of where he works. Note that the Arrangement for the Avoidance of
Double Taxation between Hong Kong and China provides that the director will be
exempted from PRC income tax if he is a Hong Kong resident and he stays in China
for less than 183 days in the tax year.

In this case, the director of the BVI Company will not be liable to Hong Kong salaries
tax, with the exception that he performs his duty in Hong Kong for more than 60 days
in the fiscal year. See section 8(1A)(a) of the Hong Kong Inland Revenue Ordinance.
Note that where the director works in China for most part of the year, he is liable to
PRC individual income tax.