Hong Kong adopts a territorial source principle of taxation.  Corporations are subject to a two-tiered profits tax rate: the first HK$2 million of assessable profits will be taxed at 8.25% and any remaining assessable profits will be taxed at 16.5%.  The government authority that administers the calculation and collection of profits tax is the Hong Kong Inland Revenue Department (IRD).  The scope of profits tax is limited to profits attributable to business activities conducted within the physical territory of Hong Kong.

General Rule for Profits Tax

Generally, a non-Hong Kong company will be subject to profits tax if it is established that: (a) that company carries on a trade, profession or business in Hong Kong; (b) that company has profits from such trade, profession or business carried on by that company in Hong Kong; and (c) such profits arise in, or derive from, Hong Kong.  There is no concept of "central management and control".

In relation to criterion (a), according to the Frequently Asked Questions on Non-Resident Persons (Other than Individuals) issued by the IRD, whether a company is carrying on a business in Hong Kong is a question of fact and the non-Hong Kong company does not need to have extensive activities in Hong Kong before it is considered to be carrying on a business in Hong Kong.  Accordingly, any continuing presence in Hong Kong may be considered carrying on a business in Hong Kong.  Criterion (b) will also be satisfied if the business that the non-Hong Kong company carries on generates profits in Hong Kong.

In relation to criterion (c), according to the Departmental Interpretation and Practice Notes No. 21 dated July 2012 issued by the IRD, the focus of the assessment is to ascertain what operations of the non-Hong Kong company produced the relevant profits and where those operations took place.  For example, with respect to profits from trading listed shares and other securities, locality is determined by the location of the stock exchange where the shares or securities in question are traded.  Where the trade took place over-the-counter, locality is determined by the place where the contracts of purchase and sale are effected.  Similarly, with respect to profits from trading unlisted shares and other unlisted securities, locality is determined by the place where the contracts of purchase and sale are effected. "Effected" does not only mean that the contracts are legally executed, but it also covers the negotiation, conclusion and execution of the terms of the contracts.

Exemptions

1. Double Taxation Relief: Double taxation arises when the same item of taxable profit is subject to tax in more than two tax jurisdictions.  Hong Kong adopts a territorial source principle of taxation, whereby only profit sourced in Hong Kong is taxable and that sourced outside Hong Kong is, in most cases, not taxable.  Countries that tax their residents on a worldwide basis also provide their residents unilateral tax credit relief for any Hong Kong tax paid on profit derived from the region.  Businesses operating in Hong Kong therefore do not generally have problems with double taxation of income.
2. Other Reliefs: Dividends or overseas branch profits repatriated to Hong Kong are not subject to Hong Kong tax.  Capital gains are also tax exempt.  Stamp duty is imposed on certain documents such as share transfers, leases and sales of real property, except where intra group relief, stock borrowing relief or Islamic bond scheme relief under the Inland Revenue Ordinance is applicable.  Whilst a fixed amount applies to some documents, duty on others increases with the value of the transaction.
3. Unified Funds Exemption: Prior to 1 April 2019, profits tax analysis in relation to a non-Hong Kong fund is conducted based on general rule for profits tax (described above).  On or after 1 April 2019, all funds, regardless of domicile, structure or location of management, benefit from the tax exemption for profits arising in or derived from business carried out in Hong Kong, provided that certain conditions are met. To benefit from the Unified Funds Exemption, a vehicle must meet the specific definition of "fund", which in effect covers most funds except for a "fund of one".  In addition, a "fund" has to either have engaged a corporation licensed or an authorized financial institution registered for carrying out any regulated activity to arrange or carry out in Hong Kong its transactions or be a "qualified investment fund". Amongst other requirements, a "qualified investment fund" must have more than four investors, other than the fund sponsor and its associates.  Investors such as a pension fund, insurance company or sovereign wealth fund would be considered as one single investor even though they have a large number of beneficiaries.  Whether a multi-fund vehicle structure is counted as one fund is a question of fact, and the IRD may examine constitutive documents, the investment mandate and the management agreement when making a determination.  The Unified Funds Exemption exempts profits tax payable on income arising from "qualifying transactions" (i.e. typical transactions carried out by funds) and "incidental transactions" up to 5 percent of the fund’s total trading receipts.
4. Tax Concession for Carried Interest: For tax years commencing on or after 1 April 2020, carried interest earned by, or accrued to, qualifying persons (including corporations licensed under the SFO) and certain of its employees, in connection with the investment management services provided by them to a fund certified by the Hong Kong Monetary Authority (HKMA) to be eligible, will be taxed at 0% in Hong Kong.  In considering the certification, the HKMA will assess, among other things, (i) whether a fund managed by a qualifying person has invested in certain securities of, or issued by, a private company and (ii) whether the qualifying person has for the applicable tax year an operating expenditure of HK$2 million or more incurred in Hong Kong and an average number of 2 full-time employees qualified in and in fact carrying out investment management services.