Hong Kong's Territorial Source Principle of Taxation
Hong Kong adopts a territorial basis for taxing profits derived from a trade, profession, or business carried on in Hong Kong. Profits Tax is only charged on profits which arise in or are derived from Hong Kong. In simple terms this means that a person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits.
The Inland Revenue Department (“IRD”) will consider the following principles to determining the source of profits.
- Matter of fact
- The operations test
- Antecedent or incidental activities
- Place where decision is made
- Gross profits from transactions
- Business presence overseas
For trading business, the factor that determines the locality of profits from trading in goods and commodities is generally the 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.
For sale or purchase commission, when a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities of the commission agent are performed.
For service fee income is subject to tax if the services which give rise to the payment of the fees are performed in Hong Kong.
