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Hong Kong adopts a territorial basis for taxing profits derived from a trade, profession, or business carried on in Hong Kong. Profits Tax is only charged on profits which arise in or are derived from Hong Kong. In simple terms this means that a person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits. In other words, offshore profits are not chargeable to profits tax. The following information is a summarization of the basic principles for determining the profit source for different types of profit or income, including trading profits, manufacturing profits and commission income:

Trading Profits

The factor that determines the locality of trading profits is generally the place where the contracts for purchase and sale are “effected”. “Effected” does not only mean that the contracts are legally executed. It also covers the negotiation, conclusion and execution of the terms of the contracts.

In order to qualify for offshore profits claims, Hong Kong companies cannot participate in profit-generating activities in Hong Kong including the sourcing of suppliers and customers from the Hong Kong office. The suppliers and customers of the Hong Kong company must also be located outside Hong Kong. If these qualifications are not met, any profits arising from them will be taxable. That said, co-ordinating shipments, issuing invoices, arranging banking facilities and maintaining accounts in Hong Kong do not necessarily indicate that profit is effected in Hong Kong. Generally speaking, the totality of the facts will be considered by the Inland Revenue Department in reviewing any offshore profits claims.

Klako Group, through its International Import and Export Programs, provides customers with a complete outsourcing and reinvoicing solution to foreign companies looking to have an operational Hong Kong company without the cost of staffing an office themselves.

Manufacturing Profits

The source of profits for a manufacturing business is the place where the goods are manufactured.
It is common for a Mainland entity to be responsible for processing, manufacturing or assembling the goods to be exported outside the Mainland, whereas the Hong Kong company provides materials, technical know-how, management, design and training, etc. In this scenario, the Inland Revenue Department, would normally allow the apportionment of profits on the sale of the goods concerned on a 50:50 basis.

In cases where the manufacturing work is contracted to an independent sub-contractor in the Mainland, paid for on an arm's length basis, and there is minimal involvement on the part of the Hong Kong business in the manufacturing work, then the manufacturing in the Mainland is not regarded as having been carried out by the Hong Kong business. Under these circumstances, profits of the Hong Kong company will be viewed as trading profits rather than manufacturing profits and will be fully taxable in Hong Kong.

Commission Income

When a business earns commission by securing buyers for products or by securing suppliers of products required by customers, the activity which gives rise to the commission income is the arrangement of the business to be transacted between the principals. The source of the income is the place where the activities of the commission agent are performed. If such acitivities are performed in Hong Kong, the income has a source in Hong Kong is therefore subject to tax in Hong Kong. If the activities to earn commission income are not performed in Hong Kong, the income is not sourced in Hong Kong and will therefore not be subject to tax.


The above sets out the brief basis on which the profit source is determined. That said, each individual business case needs to be determined on its own merits and companies should review their operation thoroughly before claiming any offshore profits.