Hong Kong tax policy on profits tax income
What does it mean by profits tax income and how does it affect taxation for your Hong Kong company?
For general information on corporate taxes and tax rates, refer to Hong Kong corporate profits tax guide. Note that the information provided is for general purpose only and not meant to replace professional advice on corporate profits tax.
Profits tax is payable by every person (defined to include corporation, partnership, and sole proprietorship) carrying on a trade, profession, or business in Hong Kong SAR on profits arising in or derived from Hong Kong SAR from that trade, profession, or business.
As per the Profits Tax policy of HK, the corporate Profits Tax is imposed on income that is
Earned in Hong Kong
The first part deals with income that has a source in Hong Kong. The second part is income with a source outside Hong Kong .
In order to determine whether an income is subject to taxation in Hong Kong, the following questions need to be answered:
Does the income qualify as profits tax income?
Was the sourced income “arising in or derived” from Hong Kong?
Under the Hong Kong Tax Ordinance, an entity has to pay profits tax under the following conditions:
the entity carries on a trade, profession or business in Hong Kong;
the trade, profession or business earns profits; and
the profits are sourced in Hong Kong; or
Those conditions are straightforward.
Often where the principal place and management team of business is located in Hong Kong, profits earned by that business are likely to be treated as sourced in Hong Kong.
One of the factors that determines the locality of profits from trading in goods and commodities is the place where the contracts for purchase and sale are effected. “Effected” does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts.
When a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities of the commission agent are performed. If such activities are performed in Hong Kong, the income will be treated as sourced in Hong Kong.
In considering the relevant facts, the nature and quality
of the activities matter more than their quantity. It is the cause and effect of such activities on the profits that is the deciding factor.
