Does it matter where a Hong Kong company's directors make decisions when claiming offshore profits?
It is a factor but usually not the deciding one. The IRD and the courts look first at the operations that actually earned the profit and where they took place. The place where day-to-day investment or business decisions are taken is only one factor, so directors abroad do not by themselves make profits offshore.
The courts, as summarised in the 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.
Legal basis
- Inland Revenue Ordinance (Cap. 112), s.14
Sources
Applies to YA 2025/26 · Last reviewed 29 October 2026
General information for business owners, not legal, tax or professional advice. Rules change, so check the sources or ask a licensed professional before you act.
Related questions
- Does a Hong Kong company pay tax on profits earned overseas?Generally no. Profits sourced outside Hong Kong are outside the profits tax charge, even if the company is incorporated here. The exceptions are certain foreign-sourced passive income received in Hong Kong by members of multinational groups under the FSIE regime, and any profits the IRD finds are actually sourced in Hong Kong.
- Does the FSIE regime apply to my small Hong Kong company?Only if the company is a member of a multinational enterprise group, meaning a group with at least one entity or permanent establishment outside the ultimate parent's jurisdiction. A Hong Kong company owned by individuals with no foreign branch or subsidiary is outside the FSIE rules. A foreign parent or overseas subsidiary generally brings you in.
- Does Hong Kong's global minimum tax (Pillar Two) affect my SME?No, unless your group is very large. The global minimum tax and Hong Kong minimum top-up tax apply only to multinational groups with annual consolidated revenue of EUR 750 million or more in at least two of the four preceding fiscal years. They apply from fiscal years beginning on or after 1 January 2025.
- What is Hong Kong's territorial source principle of taxation?Hong Kong charges profits tax only on profits that arise in or are derived from Hong Kong from a trade, profession or business carried on here. Profits that have a source outside Hong Kong are not chargeable. Where the source lies is a question of fact, decided case by case.
- Does Hong Kong have VAT, GST or sales tax?No. Hong Kong has no value-added tax, goods and services tax or sales tax. The only taxes on income are profits tax, salaries tax and property tax, plus duties such as stamp duty. The government also confirms there is no capital gains tax and no withholding tax on dividends or interest.