Section 14 of the Inland Revenue Ordinance charges profits tax only on profits arising in or derived from Hong Kong. That territorial principle is the basis of an offshore claim.
It is also widely misunderstood. Having overseas customers, a foreign bank account or a director who lives abroad does not by itself make profits offshore. What matters is where the operations that produced the profits were actually carried out — the “operations test”.
On this page
- What is included
- How source is determined
- Evidence you will need
- The claim process
- Risks and realistic expectations
- Common questions
What is included
- Preliminary assessment of whether a claim is realistically sustainable
- Mapping of the profit-generating activities and where each takes place
- Assembly of a documentary evidence file
- Preparation of the claim and supporting analysis with the profits tax return
- Drafting replies to the Inland Revenue Department's enquiry letters
- Follow-through to assessment or determination
How source is determined
The courts apply a broad guiding principle: look at what the taxpayer has done to earn the profit in question, and where they did it. In practice the Inland Revenue Department focuses on different activities depending on the type of income:
| Type of profit | What is examined |
|---|---|
| Trading profits | Where the purchase and sale contracts were effected |
| Manufacturing profits | Where the goods were manufactured |
| Service income | Where the services were performed |
| Commission income | Where the activities earning the commission were carried out |
Antecedent and incidental activities — market research, general administration, bookkeeping — are generally not decisive.
Evidence you will need
- Contracts, purchase orders and sales confirmations, with dates and places of signing
- Email and messaging records showing where negotiations took place
- Travel records — air tickets, boarding passes, visas, hotel invoices
- Shipping documents showing the movement of goods
- Details of overseas offices, staff or agents, if any
- Bank records showing where payments were received and made
Records must be retained for at least 7 years under section 51C of the Inland Revenue Ordinance.
The claim process
- Review — we assess the operating model against the operations test.
- Evidence file — assembled contemporaneously, not reconstructed later.
- Claim — made in the profits tax return with a supporting analysis.
- Enquiry — the IRD typically issues a detailed questionnaire; replies are drafted with the evidence attached.
- Outcome — acceptance, partial acceptance, or an assessment that may be objected to.
Expect the enquiry stage to take several months. It is normal.
Risks and realistic expectations
An offshore claim is a substantive position, not a filing option. If the evidence does not support it, the outcome is an assessment plus, potentially, additional tax under section 82A. We will tell you plainly if we think a claim will not hold — that assessment is part of the service.
Note also that an accepted claim covers the year examined. The position must be maintained, and the evidence recreated, every year.
Common questions
All my customers are overseas. Is that enough?
No. Customer location is not the test. What matters is where the contracts were effected and the profit-producing work performed.
How long does the enquiry take?
Commonly six to eighteen months from the first enquiry letter, depending on complexity and how quickly evidence is provided.
Does an offshore claim mean no tax return?
No. The return, audited accounts and tax computation are all still required — see profits tax filing.
Call 3687-1127 or describe your operating model for an initial view before you commit.