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.
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 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 FSIE rules) can treat certain foreign-sourced passive income of multinational group members as taxable. See the separate answer on FSIE.
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.
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 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.
- Are dividends taxed in Hong Kong?No, not in the hands of the recipient in the normal case. Hong Kong has no withholding tax on dividends, and a dividend from a company that is itself subject to Hong Kong profits tax is excluded from the recipient's assessable profits. Foreign-sourced dividends of multinational group members can be taxable under the FSIE rules.
- What is the profits tax rate for a Hong Kong company?Under the two-tiered system, a corporation pays 8.25% on its first HK$2 million of assessable profits and 16.5% on the rest. The lower rate is available to only one entity in a group of connected entities. This applies from year of assessment 2018/19 onwards.
- What profits tax rate do sole proprietors and partnerships pay in Hong Kong?Unincorporated businesses pay 7.5% on the first HK$2 million of assessable profits and 15% on the remainder, from year of assessment 2018/19. This is the two-tiered system. As with companies, only one entity in a group of connected entities can use the lower rate.