The Hong Kong SAR adopts a territorial source principle of taxation on profits derived from a trade, profession, or business carried out in Hong Kong. Only profits arising in or derived from Hong Kong are taxable. In this case, any Hong Kong incorporated company which derives profits from another place (or what is called “offshore profits”) is not required to pay tax in Hong Kong on those profits.
The factor that determines the source of profits from trading goods is where the contracts for purchase and sale are legally executed. Following the Court of Appeal judgment in the court case “Magna Industrial Co. Ltd. v CIR”, the Inland Revenue Department will now look at all relevant operations carried out to earn the profits, including negotiation, conclusion and execution, in order to determine the source of trading profits.
Service fee income is not taxable when the service rendered is outside Hong Kong.
With respect to offshore profits claims, EATPL will directly handle queries from the Inland Revenue Department on its clients’ behalf. It will review the client’s operation, including the background of the client, major customers and suppliers, persons involved in negotiation, conclusion and execution of the deal and collect such evidence as contracts, invoices, purchase orders, sales orders, messages communicated by email, fax, instant communication devices, etc. and finally present all information and documentary evidence in a systematic way to the Commissioner of Inland Revenue for his review and determination of offshore profits claims. EATPL will also advise its clients on how to re-engineer and restructure their operations to enhance tax efficiency.