Tax Assessment for Land Redevelopment Arrangement Annulled by the Court of Final Appeal

September 2019

The Court of Final Appeal recently annulled a profits tax assessment in relation to the payment received by the landowner upon a disposal of land for redevelopment in Perfekta Enterprises Limited v Commissioner of Inland Revenue [2019] HKCFA 25. The decision demonstrates the importance to consider the legal structure and tax implications prior to commencing any kind of collaboration for redevelopment projects.


This case concerns a long-running tax dispute that began in 1991. The appellant, a Hong Kong company Perfekta Enterprises Limited (“Perfekta”) was a toy manufacturer and the owner of a piece of land with a factory building in Kwun Tong, which it used as its manufacturing base in Hong Kong since 1969. Following the relocation of its manufacturing base from Hong Kong to the Mainland from the late 1970s, Perfekta made a series of applications in 1991 to 1993 to various government departments for the redevelopment of the land into a composite industrial and office building. In about 1994, Perfekta began discussing the redevelopment plan with Cheung Kong (Holdings) Limited (“Cheung Kong”).

On 30 July 1994, Perfekta, Cheung Kong and Great Poka Limited (“Great Poka”, a subsidiary of Cheung Kong) entered into a redevelopment agreement, under which Great Poka paid an “Initial Payment” of about HK$165 million to Perfekta as consideration for the right to redevelop the land. In return, Perfekta agreed to assign the land to its new wholly owned subsidiary (which was thereafter incorporated as Prodes Company Limited (“Prodes”) and to procure such new subsidiary to enter into a new joint venture agreement with Great Poka (“the New Agreement”) for the redevelopment of the land.

Pursuant to the redevelopment agreement, Perfekta later assigned the land to Prodes and thereafter Prodes entered into the New Agreement with Great Poka and Cheung Kong.

The Inland Revenue Department charged Perfekta for profits tax on the initial payment, and Perfekta later appealed to the Board of Review which annulled the profits tax assessment. The case was then further appealed by the parties and both the Court of First Instance and the Court of Appeal ruled in favour of the Inland Revenue Department and held that profits tax shall be chargeable on the Initial Payment.

The relevant law and central issue

The relevant tax law was set out clearly under section 14(1) of the Inland Revenue Ordinance, according to which profits tax would not be chargeable on the Initial Payment if it was arising from the sale of a capital asset, and it would only be chargeable if it was derived from carrying on of “a trade, profession or business in Hong Kong”. Since it was common ground that the land had been held by Perfekta as long-term capital asset prior to disposal, the central issue before the Court of Final Appeal was whether Perfekta had changed its intention in relation to the land from capital holding to trading.

The final appeal

the Court of Final Appeal set aside the decisions of the courts below and held that there was no such change of intention by Perfekta.

It first reaffirmed the principle that disposal of land at an enhanced value or expenditure of money on the property to enhance its sale price would not necessarily indicate an intention to trade by the landowner, and thus the steps taken by Perfekta, i.e. seeking approvals from different government departments for redevelopment of the land, were consistent with its intention to dispose the land as capital asset for the best price obtainable and do not necessarily indicate an intention to trade.

the Court of Final Appeal also considered that the courts below had overlooked an important fact that the redevelopment was carried out by Prodes, which was a subsidiary and separate legal entity, instead of Perfetka itself. This was evidenced by the provisions of the redevelopment agreement and the relevant board minutes of Perfekta discussing the redevelopment proposal. As such, it was Prodes, instead of Perfekta, which had the intention to trade and redevelop the land. The courts below were wrong in ruling that Prodes was a mere nominee or alter ego of Perfetka and the use of Prodes was only a method or mechanics of implementing Perfetka’s intention to trade.

Finally, the Court of Final Appeal rejected the Inland Revenue Department’s alternative argument that Perfekta was in the business of procuring a subsidiary to enter into the property redevelopment joint venture. It considered that Perfekta was a toy manufacturer, and no part of its business was to act as a procurer of joint venture participants for property development.


Under these circumstances, the Court of Final Appeal held that the true and only reasonable conclusion on the facts was that Perfekta did not change its intention in relation to the land from capital holding to trading and did not enter into a venture in the nature of a trade by disposing the land. Therefore, the payment received by Perfecta was not subject to profits tax.

In this case, the Court of Final Appeal also acknowledged that in the context of taxation, the separate legal entity of a company can only be disregarded under limited circumstances; for example, in the case of artificial and fictitious transactions which were designed to avoid tax. Landowners should bear in mind the potential tax implications prior to entering into any agreement of collaboration for redevelopment projects.