The Territorial Source Principle of Taxation
Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are not subject to Hong Kong Profits Tax.
The principle itself is very clear but its application in particular cases can be, at times, contentious.
Under the Inland Revenue Ordinance, a person is chargeable to Profits Tax under the following conditions: Basic principles for determining the source of profits The Courts have over the years considered the subject of the source of profits. The following principles have emerged from authoritative court decisions: --The operations test 1. Where the contracts of purchase and sale are effected in Hong Kong, the profits are taxable here. 2. Where the contracts of purchase and sale are effected outside Hong Kong, the profits are not taxable here. 3. Where either the contract of purchase or the contract of sale is effected in Hong Kong, the initial presumption is that the profits are taxable here. However, the totality of facts will have to be examined to determine the source of profits. 4. Where the sale is made to a Hong Kong customer, the sale contract will usually be taken as having been effected in Hong Kong. 5. Where the effecting of the purchase and sale contracts does not require travelling outside Hong Kong but is carried out in Hong Kong by use of telephone, or other electronic means including the Internet, the contracts will be considered as having been effected in Hong Kong. 6. Trading profits are regarded as being either wholly taxable or wholly non-taxable here. Apportionment is not appropriate.
--he carries on a trade, profession or business in Hong Kong;
--the trade, profession or business derives profits; and
--the profits arise in or are derived from Hong Kong.
--Gross profits from transactions
--Place where decision is made
--Business presence overseas
Profit of trading firms
