Opportunities Hong Kong Offshore Profit Tax Exemption 

Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are notsubject to Hong Kong Profits Tax. The principle itself is very clear but its application in particularcases can be, at times, contentious. 

To clarify the operation of the principle, we have prepared thissimple guide on the territorial source principle of taxation. 

Hong Kong Companies Income sourced outside Hong Kong are not taxable 

The Courts have over the years considered the subject of the source of profits. The followingprinciples have emerged from authoritative court decisions.

Matter of fact

The question of locality of profits is a hard, practical matter of fact. No universal rule can apply toevery scenario. Whether profits arise in or are derived from Hong Kong depends on the nature ofthe profits and of the transactions which give rise to such profits.

The operations test

The broad guiding principle is that one looks to see what the taxpayer has done to earn the profitsin question and where he has done it. In other words, the proper approach is to identify theoperations which produced the relevant profits and ascertain where those operations took place.The source of profits must be attributed to the operations of the taxpayer which produce them andnot to the operations of other members of the taxpayer’s group.

Antecedent or incidental activities 

The relevant operations do not comprise the whole of the taxpayer’s activities. The focus is on establishing the geographical location of the taxpayer’s profit-producing transactions as distinct from activities antecedent or incidental to those transactions.

Place where decision is made

The place where the day-to-day investment/business decisions take place is only one factor whichhas to be taken into account in determining the source of profits. It is not usually the deciding factor.

Gross profits from transactions

The distinction between Hong Kong profits and offshore profits is made by reference to the grossprofits arising from individual transactions

Business presence overseas

A business may maintain a presence overseas which earns profits outside Hong Kong but theabsence of a business presence overseas does not, of itself, mean that all the profits of a HongKong business invariably arise in or are derived from Hong Kong. However, in the vast majority ofcases where the principal place of business is located in Hong Kong and there is no businesspresence overseas, profits earned by that business are likely to be chargeable to Profits Tax in HongKong.

Domestic Tax Planning Strategies

Capital gain claim

Financial year-end date

Interest income taxability

Utilization of companies with tax losses

Apportionment of onshore and offshore profits and expenses

Segregation of onshore and offshore businesses and profits

Capital expenditure timing and classification

Expenses deduction, etc

International Tax Planning Strategies

Cost-sharing arrangement

Cross-border activities

Risks and taxation exposure segregation

Holding structures, etc