Do overseas directors make a Hong Kong company's profits offshore?

The courts, as summarised in the Inland Revenue Department's (IRD's) guide, apply the operations test: identify what the taxpayer did to earn the profit and where it did it.

• Decision-making place: where day-to-day business or investment decisions are made is one factor to consider, not usually the decider.
• Antecedent or incidental activities (such as marketing before the deal, or banking afterwards) get less weight than the profit-producing transaction itself.
• Contract place: for trading profits, where the purchase and sale contracts were effected is typically central.
• Presence in Hong Kong: the IRD notes that a taxpayer's presence and activities in Hong Kong are not conclusive on source, but they are not irrelevant either.

Implication for foreign-owned companies: having overseas directors or customers does not make profits offshore if the actual operations (negotiation, contracting, sourcing, delivery) happen in Hong Kong. Likewise, a company with a Hong Kong address and some staff can still have genuine offshore profits if the key operations are performed elsewhere.

Separate issue: company residence for treaty purposes (being managed or controlled in Hong Kong) is a different test from the source of profits.

Because locality is a question of fact, document your case before you file, and consider asking the IRD for an advance ruling for a significant arrangement.