In relation to the previous article regarding the definition of operating a business, this article will discuss how the Hong Kong Inland Revenue Department levy the profits tax based on geographical sources. At present, there are no rules on the principle of definite sources of income. However, you can refer to the “Departmental Interpretation and practice notes” No. 21 of the Inland Revenue Department, which provides some guidelines for determining different types of sources.
The Hong Kong tax office summarized the basic principles for determining income:
• The locality of profit is a practical and factually determined issue. No one rule can be applied to every case. Whether the profits come from Hong Kong depends on the nature of the profits and the transactions that generate those profits.
• Covering the general guiding principle is to see what activities the taxpayer has undertaken to earn the relevant profits, and to determine where he has completed these activities.
• The focus is to determine the geographic location of the taxpayer’s profit-generating transaction, and the previous or secondary activities of its related business will be considered separately.
• When determining the source of profit, the taxpayer’s business decision is only a factor that must be considered, but it is usually not a determining factor.
• Taxpayers setting up companies overseas and making profits outside Hong Kong are not required to pay profits tax. But if there is no establishment of a company overseas and profits are made outside of Hong Kong, this does not mean that all the profits of the Hong Kong business come from Hong Kong. However, in most cases, if the taxpayer’s main place of business is located in Hong Kong and does not have any business overseas, the profits it earns are likely to be levied on profits tax.
The above information is for reference only.
If you are in doubt, we welcome your tax inquiries