The tax law states that if a business operating in Hong Kong, and the profits are generated or derived from Hong Kong, the business needs to pay for profits tax. In past cases, the court will use the source to explain the wording of “arising in or derived from”. To determine the source of profit is a practical issue, which must be determined based on the facts of each case, and the facts are:
• What is the profit-making activity of the taxpayer?
• Where does the taxpayer conduct this activity?
The Inland Revenue Department will identify the operating activities that generate profits, and will also find out the location of the actual transaction where the most profit is made, and then determine that the location is the source of the profit. As for its previous and secondary activities, it will be considered separately.
If taxpayers in the service business industry provide or perform services outside Hong Kong, the profits generated are not taxable. However, the location and residence of the taxpayer is usually irrelevant for those activities occurred before or after the generation of profit.
The above information is for reference only. If in doubt, we welcome your tax inquiries