Profits derived from carrying on business in Hong Kong are not necessarily subject to profits tax. Under section 14 of the Inland Revenue Ordinance, only profits derived from Hong Kong are subject to profits tax, irrespective of the place of incorporation of the company. A taxpayer is subject to profits tax if the following three conditions are met.
(a) the taxpayer must carry on business in Hong Kong
(b) the profits chargeable to tax are derived from the business carried on
(c) the profits are generated or derived from Hong Kong
There is no legislative rule on the basic principles for determining the source of profits, but according to the Departmental Interpretation and Practice Notes (DIPN) No. 21 of the Inland Revenue Department (IRD), the basis for taxation of profits is the territorial concept. Even if a taxpayer has multiple businesses in Hong Kong, only profits arising in or derived from Hong Kong are taxable. The principle of the IRS guidelines is to identify the substantive underlying business activities of the taxpayer that generate the taxable profits, and the place where the activity is carried out is the source of the taxable profits.
In order to cope with the development of technology and to reduce operating costs, many taxpayers are now operating their businesses online through servers, making the mode of operation more electronic, and many operating activities can be completed by electronic automation systems without the need for manpower, such as automatically distributing goods, providing service information, setting up contracts, processing orders for goods, processing payments, conducting various transactions, etc…which makes the Hong Kong This makes it more difficult for the Inland Revenue Department (IRD) to collect tax from e-businesses. The IRD will not focus on the automatic electronic operation of the e-business itself, nor will it rely solely on the location of the e-business server as the source of profits for the business. Therefore, the IRD has issued Departmental Interpretation and Practice Notes (DIPN) No. 39, which states that the taxation of e-business will be considered from the following three major directions:
Whether the e-business company operating in Hong Kong is regarded as a permanent establishment
whether the taxpayer operates the e-business in Hong Kong
the weight of the server-based online business activities in relation to the core activities of the e-business
We will explain each of the above points in the following time, so please pay attention to our website.
The above information is for reference only. If you have any questions, we welcome your tax inquiries.
Translated with www.DeepL.com/Translator (free version)