Section 14 of the Hong Kong Inland Revenue Ordinance (“IRO”) states that profits tax shall be charged for each year of assessment on every person carrying on a trade, profession or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong from such trade, profession or business. This applies to both residents and non-residents of Hong Kong.
Profits tax may be levied on the non-resident directly (assessed in his own name) or indirectly (assessed on his agent) in respect of all profits arising in or derived from Hong Kong, from any trade, profession or business carried on there, whether or not the agent has the receipt of the profits, and the tax may be recovered out of the assets of the non-resident or from the agent. The agent is required to retain from the assets sufficient money to pay the tax.
According to Section 2 of the IRO, “agent” includes (a) the agent, attorney, factor, receiver or manager in Hong Kong, and (b) any person in Hong Kong through whom the non-resident is in receipt of any profits arising in or derived from Hong Kong.
Source:Hong Kong Inland Revenue Department’s website
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Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are not subject to Hong Kong Profits Tax. The principle itself is very clear but its application in particular cases can be, at times, contentious. This guideline note gives a brief explanation of how the principle operates and provides simple examples for illustrative purposes of the tests applied to different types of businesses.
According to Section 18C of Hong Kong Inland Revenue Ordinance, there are three possible cases for the first accounting period:if the first accounts are made up to a day within that year of assessment, the basis period for the year of commencement is from the date of commencement to the date which the accounts are made up.
What are assessable profits? The assessable profits are the net profits (other than profits arising from the sale of capital assets) for the basis period, arising in or derived from Hong Kong, calculated in accordance with the provisions of Part IV of the Inland Revenue Ordinance (“IRO”). IRO does not define “profits”. In business practice, profit means the net profit, or the net gain, or the surplus of incomes over expenses.
Section 14 of the Inland Revenue Ordinance sets out the scope of the charge to profits tax. In addition, Section 15 deems the following to be taxable trading receipts in Hong Kong: Sums received from the exhibition or use in Hong Kong of cinematography or television film or tape, sound recording or their connected advertising materials [Section 15(1)(a)].