Profits tax is levied under the Inland Revenue Ordinance on the “assessable profits” of corporate entities, partnerships, trusts and sole proprietorships. It is levied according to the “territorial principle” meaning that only those profits which arise in or are derived from Hong Kong are subject to Hong Kong profits tax.

The territorial principle means that only income which meets the following 3 preconditions is subject to Hong Kong profits tax:

• The entity must trade, profession or business in Hong Kong
• The income must arise from such a trade, profession or business
• The income must arise in or be derived from Hong Kong

There is no distinction made between residents and non-residents. A resident may derive profits from abroad without suffering tax; conversely, a non-resident may suffer tax on profits arising in Hong Kong. The question of whether a business is carried on in Hong Kong and whether profits are derived from Hong Kong is largely one of fact.

“Source of income” for profits tax purposes has been defined as the geographical location of the operations which substantially gave rise to the income, Inland Revenue Department issued the Departmental Interpretation and Practice Notes No. 21 (Revised) – Locality of Profits on July 2012 to set out its views on how the source of profits is to be determined with respect to various types of income or profits:

Trading profits: Place where the contracts for purchase and sale are effected. “Effected” does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts.

Manufacturing profits: Place where the goods are manufactured. Where goods are manufactured partly in Hong Kong and partly outside Hong Kong, that part of the profits which relates to the manufacture of goods outside Hong Kong will not be regarded as arising in Hong Kong.

Sales and purchase commission: Place where service is performed.

Real property income/profits: Location of property.

Profits from listed shares and securities: Location of stock exchange where shares are traded. Where the purchase and sale took place over-the-counter, locality is determined by the place where the purchase and sale contracts are effected.

Profits from unlisted shares: Place where the contracts for purchase and sale are effected.

Services fees: Place where service is performed.

Interest income: Place where the money is first made available to the borrower.

Cross Border Land Transportation income: Place of uplift of passengers or goods.

Royalties: Place of acquisition and granting of the licence or right of use.

Source：Hong Kong Inland Revenue Department’s website

- https://www.ird.gov.hk/eng/tax/bus_pft.htm
- https://www.ird.gov.hk/eng/paf/bus_pft_tsp.htm
- https://www.ird.gov.hk/eng/pdf/dipn21.pdf
- https://www.ird.gov.hk/eng/pdf/dipn13.pdf