Territorial Source

Many entrepreneurs form Hong Kong companies to run their e-commerce for tax saving purpose.  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.

As such, if your e-commerce does not have a territorial source in Hong Kong, no profits tax will be charged. Pure Hong Kong company and even presence of a server in Hong Kong by themselves will not satisfy this principle and be subject to profits tax in Hong Kong in general. Details are stated below.

DIPN 39
The only guidance related to e-commerce and issued by our Inland Revenue is the Departmental Interpretation and Practice Notes No 39 (DIPN 39), which was issued over 10 years ago.

DIPN 39 is for information and guidance only. It has no binding force and do not affect a person’s right of objection or appeal to the Commissioner, the Board of Review or the Courts.

DIPN 39 says that the Inland Revenue Ordinance should be applied to e-commerce on the same basis as to conventional forms of business. It is more appropriate to focus on the broad taxation principles in Hong Kong:

1) Carrying on trade, profession or business in Hong Kong
– A totality of facts should be considered when determining whether a person engaged in e-commerce is carrying on a trade or business in Hong Kong, e.g. locations of the following: storage of goods, services, payments, purchases & sales, bank accounts, etc.

– Presence of a server in Hong Kong, even if it is capable of concluding contracts, processing payments or arranging deliverable of physical/ digital goods, without involvement of human activities in Hong Kong would not generally amount to satisfaction of “carrying on business in Hong Kong” by itself.

2&3) Profits are arising in or derived from Hong Kong
– The taxpayer’s operations which produce the relevant profits need to be ascertained, and the locations of those operations
– Locations of the physical business operations usually weighs more than locations of servers

Want to know more?

Still, you need to assess your business as a whole and the effective tax rate after considering the tax assessable in all locations.  If you are interested in this area and would like to share your business model with us for more advice, simply Contact Us (CLICK HERE).