Section 2(1) of IRO: All profits from
business transacted in Hong Kong, whether directly or through an agent,
are deemed to be profits arising in or derived from Hong Kong.
"Source of profit" is a
question of facts as well as a question how to draw conclusion from the
facts based on the principles as developed in numerous tax cases. Indeed
it is a big topic of taxation for big companies which are engaged in
activities across the border of Hong Kong. For companies operating in
Hong Kong only, the Revenue will generally seek to assess their whole
profits and will not allow offshore claim except in rare cases.
In the case CIR
v. Euro Tech (Far East) Ltd, it was held that profit arose in Hong
Kong even though the activities in Hong Kong are minimal or they just comprise
administrative work. The crucial point is what and where he did to
earn the profit.
Before dwelling on the law
and practice, I would like you to understand that this topic is
sometimes controversial and there are no one single hard and fast rule
applicable to every case. Different professionals, including judges,
lawyers, tax practitioners and even IRD officers may draw different
conclusions in the same case. There are of course some general rules
developed from case law and I will talk about them later.
My general advice for an ordinary taxpayer is: follow as far as possible the general
rules, particularly those set out on my website and my tax books as well
those in the Revenue's Departmental
Interpretation Note 21. This is because any disputes going to the
court are very costly, troublesome and time-consuming. For your easy
reading, I have tried my best to make these general rules simple. Please Click here to
read my guidance notes. Happy reading.