The definition of profit source in Hong Kong

16.03.2012

A definition of a source profit source you can find in the special document under name Departmental Interpretation And Practice Notes No 21 in edition from 1998. Last changes which concern calculation questions, were made in December, 2009.

For disclosing of this definition the Internal Revenue Service of Hong Kong uses the principles stated in so significant standard document. Let’s us make a short review of these principles.  

First of all, we draw your attention that there are not universal rules, and employees of tax department analyze each concrete case separately on the basis of the given information, namely on the basis of information, what a tax bearer did for reception of considered profit and where he did it. And in certain cases when the profit occurs from different places, taxes can be paid only from a part of the profit occurring from Hong Kong. However it doesn't concern trading profit (profit from product realization) which either is completely taxed, or is completely released from this tax.

Further, as to a place where there is current business decisions, it is only one of factors which is considered at definition of a profit source. And often it is not a determinative.

The company can support its foreign structures which get profit outside of Hong Kong. However if there are not foreign structures, it doesn't mean that the profit necessarily occurs from Hong Kong. Nevertheless, in most cases, when the basic place of business dealing is in Hong Kong, and there is no business presence abroad, there is a high probability, that the profit of such business will be taxed in Hong Kong. 

The important factor, defining a profit source of trading companies, is the place where purchase and sale contracts were carried out. Concept "were carried out" includes negotiating process, the conclusion and execution of transactions. 

In the conclusion we add that a trading company doing business outside of Hong Kong, can found branch which operates in quality of "purchasing office" the activity of which would be limited only to acquisition of the goods in Hong Kong and didn't concern their sale neither in Hong Kong, nor somewhere else. In this case there will be no duty on tax payment. An affiliated company or the official representative also can act as "purchasing office". 

The changes which occurred in December, 2009, operate until now. Hong Kong always was one of attractive places for business dealing for the Russian and foreign businessmen, so remains this place. 

Expert’s opinion

«Changes in tax laws of Hong Kong, which were made in December, 2009, allow to organize an active trade turnover between China and all other world. It is the fine tool for business dealing by the Russian, Ukrainian and European businessmen. In the conditions of euro area crisis Hong Kong is fine alternative to the Cyprian companies».

On the basis: http://www.ird.gov.hk

Lomakin Yaroslav ( managing partner of Honest & Bright )