In the light of various court decisions, the IRD’s (Inland Revenue Department, the taxation authority in Hong Kong) views on the locality of profits from trading transactions carried out by a Hong Kong business can be summarized as follows:
- Where both the contract of purchase and contract of sale are affected in Hong Kong, the profits are fully taxable;
- Where both the contract of purchase and contract of sale are affected outside Hong Kong, no part of the profits are taxable;
- Where either the contract of purchase or contract of sale is affected in Hong Kong, the initial presumption will be that the profits will be fully taxable;
- Where the sale is made to a Hong Kong customer, the sale contract will usually be taken as having been affected in Hong Kong;
- Where the commodities or goods are purchased from either a Hong Kong supplier or manufacturer, the purchase contract will usually be taken as having been affected in Hong Kong;
- Where the effecting of the purchase and sale contracts does not require travel outside Hong Kong but is carried out in Hong Kong by telephone, fax etc., the contracts will be considered as having been affected in Hong Kong;
- Where the Hong Kong business is not in direct contact with an overseas supplier and customer but, as a member of a group, books profits under instructions from its overseas principal and/or associates. In situations where the Hong Kong activities of the Hong Kong business are limited to any of the following, the profits will be accepted as non-taxable:
- issuing or accepting an invoice to or from an ex-Hong Kong customer or supplier of the group based on terms already concluded by an ex-Hong Kong associate;
- arranging letters of credit;
- operating a bank account, making and receiving payments; and
- maintaining accounting records.
It should be noted that the above list of activities does not include the concluding of a contract of sale or purchase in Hong Kong.
- Where an overseas company sets up a branch in Hong Kong to act simply as a buying office, (i.e. the branch only purchases goods and is not involved in their sale) no profits tax liability will arise.