Profits Tax:
source is more important than address

01

Three conditions of Profits Tax

In general, it is checked whether a person carries on a trade, profession or business in Hong Kong, whether he receives profits and whether they arise in or originate from Hong Kong. The location of registration, invoicing or receipt of money does not in itself determine the source.

Tax base

Hong Kong sourced assessable profits

Territorial principle

The source is determined by transactions that create profit

Capital

Capital nature is analyzed factually; FSIE has separate rules

VAT/GST

There is no general VAT or GST in Hong Kong

Losses

Typically carried forward against future business profits

02

8.25% and 16.5% are not two companies in the same group

For a corporation, two-tiered rates give 8.25% for the first HK$2 million assessable profits and 16.5% for the excess. If there are connected entities, the preferential stage is used by one nominated entity, except in special cases.

First tier

8.25% · first HK$2,000,000

Remainder

16,5%

Unincorporated business

7,5% / 15%

Connected group

Typically one nominated entity uses two-tiered rates

Concessions

Individual modes require their own criteria

03

Offshore claim begins with profit-producing operations

For trading, services, commission, financing, IP and e-commerce, the source-generating actions are different. The IRD looks at what the taxpayer did to earn the profit and where it happened: negotiations, contracting and execution, purchasing and selling, risk management, personnel and decision-making.

04

FSIE limits simple passive foreign income exemption

For an MNE entity, foreign interest, dividend, IP income and disposal gain received in Hong Kong may be considered Hong Kong sourced and taxable unless an exception is met. For interest, dividends and non-IP disposal gains, economic substance is checked; participation route is available for dividends and equity disposal gains; For IP, the nexus approach applies.

Covered from 2023

Foreign interest, dividend, IP income, equity disposal gain

Expanded from 2024

Other foreign non-IP disposal gains

Received in HK

Remittance, repayment of HK business debt or purchase of imported movable property

Economic substance

Adequate people/premises or expenditure/functions

Participation

In particular, at least 5% for 12 months + anti-abuse

Intra-group relief

Deferral for qualifying associated transfers, not eternal release

05

Types of income are analyzed separately

06

The expense must produce taxable profit

Business outgoings are verified by nexus with assessable profits and special restrictions. Capital expenditure is usually not directly deductible, but allowances may apply. Losses are carried forward, and special adjustments apply to concessionary activities.

07

Related parties - arm's length and documentation

The Hong Kong transfer pricing regime requires that pricing be aligned with functions, assets and risks. Master file, local file and CbC reporting are applied when the criteria are met; Contemporaneous documentation helps justify reasonable efforts and reduce penalty risk.

Intercompany map

All goods, services, loans, guarantees and IP

FAR

Functions, assets, risks for each participant

Method

Selected arm's length method and comparables

Agreement

The contract matches the actual behavior

Tax return

Related-party disclosures are consistent with accounts

08

Annual compliance

1. 01
   Accounting close

   Revenue, source, expenses, intercompany and FX reconciliations.

2. 02
   Audit

   Financial statements and evidence of transactions.

3. 03
   Profits Tax Return

   Computation, schedules and claims.

4. 04
   Assessment

   IRD requests, objections and payment timetable.

09

Tax defense file before the first declaration

1. 01

   Map of profit-producing operations for each revenue stream.

2. 02

   Board, staff, office and decision evidence.

3. 03

   Contracts, invoices, delivery and bank trail.

4. 04

   FSIE classification and substance evidence.

5. 05

   Transfer pricing policy and related-party reconciliation.