What is Hong Kong's territorial basis of taxation (source principle)?

Hong Kong does not tax worldwide profits. A person is chargeable to profits tax only if all three conditions are met:

• they carry on a trade, profession or business in Hong Kong;
• that business makes profits; and
• those profits arise in or are derived from Hong Kong.

The Inland Revenue Department (IRD) looks at the operations that actually produced the profit and where those operations took place. In trading, that usually means where the contracts of purchase and sale were effected. Activities that are only preparatory or incidental are given less weight. There is no single universal rule, and the IRD's guidance stresses that locality is a practical question of fact.

Two points owners often miss:

• Being a Hong Kong company does not by itself make all profits taxable, and being incorporated overseas does not make Hong Kong profits exempt.
• Since 1 January 2023 a separate regime (the foreign-sourced income exemption, or FSIE, rules) can treat certain foreign-sourced passive income of multinational group members as taxable. See the answer on the foreign-sourced income exemption (FSIE) regime.

Example: a Hong Kong trading company whose contracts are negotiated and signed in Hong Kong is taxed on that profit; one whose goods are bought and sold entirely outside Hong Kong may not be.

If you rely on the principle to leave profits out of your return, you should be ready to show the evidence, because the IRD can ask for details of how the transactions were carried out.