Where contracts are made
For trading profits, where the contracts of purchase and sale were negotiated, concluded and executed is central.
Tax
Territorial profits tax: what evidence matters before the conclusion
Source of profits is a factual question. The file you keep decides the answer.
The operating question
Where were the profits made?
Hong Kong charges profits tax on profits arising in or derived from Hong Kong from a trade, profession or business carried on in Hong Kong. Profits sourced outside Hong Kong are not chargeable. That principle is simple to state and hard to apply, because the source of profits is a question of fact — decided by what the company actually did, where, and how it can prove it.
For corporations, the two-tiered regime taxes the first HK$2 million of assessable profits at 8.25% and the remainder at 16.5%. Only one entity in a group of connected entities can elect the lower tier.
What decides it
The facts the IRD looks at
Where services are performed
For service fees, the location where the services that earn the fee were actually rendered.
Who did the work, and where
Travel records, staff locations and decision-making evidence show where operations took place.
What the documents show
Contracts, correspondence, invoices and logistics records must be consistent with the claimed location.
Record-keeping
What to keep from day one
- Signed contracts showing parties, place and date of execution.
- Correspondence showing where negotiations happened and who took part.
- Travel and staff records for people involved in sales, sourcing and services.
- Invoices and shipping documents that match the contracts.
- Board minutes recording where key decisions were taken.
- Bank records that reconcile to the invoices — the account statement is not proof of source on its own.
Business records must generally be kept for at least seven years under the Inland Revenue Ordinance. An offshore claim made years later is only as strong as the file kept at the time.
Sequence
How the question usually reaches the company
First profits tax return
For a new company, the IRD typically issues the first return around 18 months after incorporation. It is filed with audited financial statements.
Offshore claim
If the company claims profits are sourced outside Hong Kong, the claim is stated in the return and supported by the facts.
Enquiry
The IRD often sends questions about operations, contracts, staff and travel. Answers must be consistent with the records.
Conclusion
The claim is accepted, partly accepted or rejected. A rejected claim can lead to assessments for earlier years.
Separately, the foreign-sourced income exemption regime that took effect in 2023 can bring certain foreign-sourced passive income received in Hong Kong by multinational-group entities into the tax net unless conditions are met. Groups should check whether it applies.
FAQ
Questions readers ask
Is a Hong Kong company automatically tax-free if it trades overseas?
No. The question is where the profits arise, which depends on where the operations that produced them took place. Many Hong Kong companies with overseas customers are fully taxable.
What is the profits tax rate for a Hong Kong company?
Under the two-tiered regime, corporations pay 8.25% on the first HK$2 million of assessable profits and 16.5% on the remainder. Only one entity among connected entities can elect the lower tier.
Do offshore companies still need an audit?
Yes. Hong Kong companies must prepare audited financial statements, and profits tax returns are filed with them whether or not an offshore claim is made.
How long must records be kept?
Generally at least seven years under the Inland Revenue Ordinance. Records should be sufficient to show how assessable profits — or an offshore position — were determined.
Sources
Primary references
- IRD — profits taxChecked 2026-11-12
- Inland Revenue Ordinance (Cap. 112)Checked 2026-11-12
- Inland Revenue DepartmentChecked 2026-11-12
- Companies Ordinance (Cap. 622)Checked 2026-11-12