Hong Kong taxes only profits that arise in or are derived from Hong Kong, so a company can claim its profits are offshore, but the taxpayer must prove it. The Inland Revenue Department examines where contracts were negotiated, where goods or services moved and who made key decisions. Some foreign passive income must also pass an economic substance test.
Profits tax is charged on profits arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong. Nothing in that wording turns on where the company is incorporated, where its directors live or where its bank account is. The law asks where the profits arise, and the courts have held that the answer is found by identifying the operations that produced the profit and asking where they were carried out.
The Inland Revenue Department publishes its view in a departmental interpretation and practice note on the locality of profits. It treats the question as one of fact and degree for each type of income. Two companies selling similar products can have different answers because their operations are arranged differently.
Territoriality applies to profits, not to all income of all kinds. Salaries are taxed under a separate tax, and since 2023 specific foreign-sourced passive income of multinational group members is dealt with under a dedicated regime, described below.
For trading profits, the key facts are where the contracts of purchase and sale were effected, which means where the terms were negotiated and agreed and the contracts concluded. A Hong Kong company whose staff negotiate with overseas customers and suppliers in Hong Kong normally has onshore profits even if the goods never touch Hong Kong. If the buying and selling are negotiated and concluded outside Hong Kong by people there, an offshore claim becomes possible.
For service fees, the focus moves to where the services were performed. Consulting delivered by staff working in Hong Kong is onshore even for a foreign client. For commissions and agency income, the question is where the agent did the work that earned the commission. For interest and similar income, the place where the credit was provided matters, and the rules differ for financial institutions.
Mixed cases need apportionment. If some contracts are negotiated in Hong Kong and others in Singapore, the company may claim only the second group, supported by evidence for each. A blanket claim covering all revenue is the easiest to challenge.
An apportionment example: a design company has three groups of clients. Contracts for the first group are negotiated by its Hong Kong team and signed in Hong Kong; the second group is handled entirely by an affiliate's staff in Singapore under a service agreement; the third is a mixture. The first group is onshore, the second may support an offshore claim with the affiliate's contracts and time records, and the third needs a split based on where each stage was done.
The department typically sends a questionnaire asking about the business model, the people who run it, and each stage of a sample transaction. Be prepared to show contracts and correspondence that identify where negotiation took place, travel and attendance records for key staff, details of agents or subcontractors and their locations, shipping documents, bank flows and board minutes. Supporting evidence is built at the time, not reconstructed at audit.
Fragile facts include a director signing in Hong Kong while the commercial negotiation was elsewhere, or an overseas employee whose real manager sits in Hong Kong. Such details can reverse a claim. Likewise, a company claiming offshore status while operating from a Hong Kong office with a team that handles every order will struggle.
Tag revenue and costs in the books by jurisdiction of activity, so the claim and the allocation of expenses can be computed from the ledger. Expenses are deductible only to the extent they were incurred in producing assessable profits, so costs of earning offshore profits are not deductible against onshore profits.
From 1 January 2023, Hong Kong applies an exemption regime to certain foreign-sourced passive income received in Hong Kong by members of multinational groups. The categories include dividends, interest, gains from the disposal of equity interests and certain intellectual property income. The income is not taxed if the recipient meets an economic substance test or other conditions, and the details depend on the type of income.
For a group with an intermediate holding company in Hong Kong, this means the substance of that holding company, its employees, premises and decision-making, now matters even when the underlying income arises elsewhere. A company that receives dividends from subsidiaries but has no staff or office in Hong Kong should review its position with an adviser.
Large multinational groups should also check the minimum top-up tax regime that Hong Kong has introduced for in-scope groups, which operates alongside the profits tax; the thresholds and mechanics are for specialist advisers.
Frequent mistakes are claiming offshore status because the customer is overseas, assuming that a foreign bank account moves the source, forgetting to document decisions made by directors on trips, and filing an offshore claim in one year and an onshore one the next without explaining the change in facts. Another is mixing Hong Kong and foreign activities in a single cost centre, which leaves no basis for allocating expenses.
Keep a file for each material revenue stream: the business model description, a sample transaction trail, the key contracts and an annual note confirming that the facts remain the same. When facts change, such as hiring a Hong Kong sales team, update the note and tell your adviser before the next return.
4softerp holds financial records for several companies in one module and can help you keep revenue streams separate by entity; it does not decide the source of profit, does not mark income as offshore and does not file claims. 4hosting offers web hosting and VPS for companies that want to maintain their own document store, with security and backups remaining your responsibility.
When the IRD queries an offshore claim, the contracts, emails and travel records turn out not to have been kept systematically.
Keep the contracts, e-mails and travel records that show where deals were negotiated and performed in your own organised archive. The 4b2b products do not link documents to transactions or build an evidence chain.
Onshore and offshore income are not recorded separately, so the tax computation is hard to prepare.
Separate local and offshore income in your books using your accountant’s method. There is no automatic tagging and no report classified by source.
No. Hong Kong taxes profits arising in or derived from Hong Kong from a trade or business carried on here. Incorporation, the location of directors and the bank account are not decisive. The question is where the operations that produced the profit took place. You must prove an offshore claim with evidence, so plan the documentation before the return.
Contracts and correspondence showing where terms were negotiated and agreed, travel and attendance records of key staff, agent and subcontractor details, shipping and bank records, and board minutes. The Inland Revenue Department usually sends a questionnaire about the business model. Evidence built at the time of the transactions carries much more weight than a reconstruction made later.
Yes, if the facts support it. Mixed businesses may apportion revenue between onshore and offshore activity, supported by evidence for each group of contracts. Expenses are deductible only against the profits they helped to produce. A blanket claim over all revenue, when some contracts were handled in Hong Kong, is the easiest to challenge.
It is a regime that applies from 1 January 2023 to foreign-sourced passive income, such as dividends, interest, equity disposal gains and certain intellectual property income, received in Hong Kong by multinational group members. The income is exempt when the recipient meets an economic substance or other specified condition. Groups with Hong Kong holding companies should review their position with an adviser.
A financial ERP for your books; offshore claims are made to the IRD with your adviser.
