Navigating Hong Kong's Tax Regulations for Offshore Profit Claims

Hong Kong's Tax Regulations for Offshore Profit Claims are influenced by its reputation as a business-friendly environment, largely due to the low tax rate established by the territorial source principle outlined in the Inland Revenue Ordinance (IRO).

What is territorial source principle?

The principle is a core feature of Hong Kong’s tax regime and applies to businesses, corporations, and individuals carrying on trade, profession, or business in Hong Kong. It means that only income or profits that are derived from or arise in Hong Kong are subject to taxation. This offshore profit is subject to the investigation of IRD for the exemption of the profit tax.

How does IRD determine the source of income?

The Inland Revenue Department (IRD), i.e. the tax department of Hong Kong, applies the approach of “Totality of facts” to examine all the relevant matters of the company’s operation and the profit-making activities in order to determine where the income is sourced. For example:

• Trading income: 

IRD looks at what all the activities related to the trading, i.e. purchase and sale, to determine where the trading income is sourced.

• Service income:

Income received from rendering services in Hong Kong would be taxable in Hong Kong generally. IRD investigates to the fact and substance, rather than the pure description, of the “service” to determine the source of the income.

• Manufacturing profit:

If the goods are produced in Hong Kong, the sale of such goods will be fully taxable as the profit-making activities are considered to be carried out in Hong Kong. Depending on the processing arrangement, the profit of selling the related finished goods may be fully taxable or on a basis of 50:50.

• Investment income:

IRD looks at the location where the shares or securities are listed if they are traded in the stock exchange. For the purchase and sale took place over- the -counter (OTC) or unlisted stock, IRD will look at the location where the contracts of purchase and sale are effected.

• Income derived from using intellectual property:

If the intellectual property is used in Hong Kong, the related income may be taxable, depending on the place of acquisition and granting of the license or right of use.

Apportionment of Onshore/Offshore profits

Generally, no apportionment of the profit is allowed, unless IRD finds it appropriate to do so. IRD will investigate all the relevant facts and documents supporting to determine the operation of a company.

How to be eligible for the offshore profit claim?

It is highly recommended to keep proper records of the operation, such as shipping documents, emails, agreements and contracts. Other documents records may include the travelling records of directors, bank statements and bank debit advice and credit advice.

For the assessment of whether the company’s profit is offshore, IRD will issue a letter to ask questions regarding the company establishments, the operation nature and the details. The supporting documents are required as the proof for the offshore operation.

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