Offshore Profits in Hong Kong: How the Source Rule Works and What an Offshore Claim Needs

By Di Ma, Project Manager 29 OCT 2026 · 5 MIN READ

Hong Kong taxes profits on a territorial basis: only profits that come from Hong Kong are taxed. So a Hong Kong company can, in principle, have profits that aren't taxed here at all. That's the idea behind an offshore claim. It's also one of the most misunderstood rules in Hong Kong tax. Here's how it works, and what a claim needs.

The rule: two conditions, both needed

Under section 14 of the Inland Revenue Ordinance, profits tax is charged on a person who:

carries on a trade, profession or business in Hong Kong, and
has profits from it arising in or derived from Hong Kong.

A Hong Kong company with an office and staff here is almost always carrying on a business here. The real question is the second one: where do the profits come from? Where the company is incorporated, where its bank account is and where the customer is don't decide it on their own.

How the IRD decides: the operations test

The IRD's practice note on the locality of profits, DIPN 21, sums up the courts' guiding principle: "one looks to see what the taxpayer has done to earn the profits in question and where he has done it". It's the operations that produce the profit that count, not the company's general administration.

Where the IRD looks, by type of profit (DIPN 21)
Profit from	Source is generally where
Services	The services are performed
Trading goods	The contracts of purchase and sale are effected
Letting property	The property is let
Lending money	The money is lent

These are starting points, not rules for every case. The note also says the final step, such as where a contract is signed, isn't necessarily decisive: the IRD looks at the whole series of operations that earned the profit.

Why claims from a Hong Kong office rarely succeed

DIPN 21 quotes the Privy Council: it will "only be in rare cases that a taxpayer with a principal place of business in Hong Kong can earn profits which are not chargeable to profits tax". In practice:

If the people who earn the profit work in Hong Kong, negotiating, selling, sourcing or performing the services here, the profit is usually from Hong Kong, even if the customers are overseas.
Sales or services to Hong Kong customers generally stay taxable.
Booking profits offshore, for example by routing invoices through another entity while the work is done in Hong Kong, is something the IRD says it takes a serious view of, with anti-avoidance rules and penalties in blatant cases.

A genuine offshore claim usually involves real operations outside Hong Kong: people based and working elsewhere who negotiate and conclude the deals, or perform the services, there.

Making a claim: the evidence

The claim is made in the profits tax return. DIPN 21 says taxpayers should be ready to prove, with supporting documentary evidence, that a profit was derived outside Hong Kong, and the assessor can ask for full information about the operations behind it. Expect detailed questions. The evidence typically includes:

Contracts, orders and correspondence showing who negotiated and concluded each deal, where, and when;
Travel records for the people involved;
Where the services were performed: staff locations, timesheets, project records;
Invoices, shipping documents and payment records that tie each transaction together;
for trading, where goods were bought and sold, and whether they ever passed through Hong Kong.

The records have to exist anyway. Section 51C requires sufficient records of income and expenditure, including vouchers, bank statements and invoices, kept for at least 7 years. An offshore claim needs more: evidence of where the work was done, collected as it happens, not reconstructed when the IRD asks.

The Certanta client portal, general ledger for the fictional demo company Harbourfront Trading Ltd's Hang Seng Bank HKD current account: each bank line coded to an account (rent, payroll, supplier payments, customer receipts) with its running balance and a link to the source document. — Every line in the demo company's ledger links to its source document: the starting point for any claim about where a profit was earned.

Certainty in advance

For a significant arrangement, the IRD offers advance rulings on the locality of profits, for a fee (DIPN 31). It's worth considering before the business is set up, rather than after an enquiry starts.

Foreign passive income: the FSIE regime

Since 1 January 2023, a separate set of rules applies to members of multinational groups, of any size. Under the foreign-sourced income exemption (FSIE) regime, foreign-sourced interest, dividends, IP income and equity disposal gains (and other disposal gains from 1 January 2024) received in Hong Kong by such an entity are treated as coming from Hong Kong and taxed, unless an exception applies, such as the economic substance or participation requirements. If your company belongs to a group with entities outside Hong Kong and receives this kind of income, check it with your adviser.

Do the books change?

No. Offshore profits are still the company's profits: they're in the accounts and audited like any others (see the audit process). The claim is made in the tax computation, which excludes them from assessable profits. That makes clean, well-documented books more important, not less: the claim can only be as good as the records behind it.

How Certanta helps

A source document behind every line, linked in your ledger: invoices, contracts and receipts in one place.
Income by customer and by type, so the profit in question can be identified and measured.
Books ready for your tax adviser, who prepares and defends the claim.

Frequently asked questions

Is Hong Kong a territorial tax system?

Yes. Under section 14 of the Inland Revenue Ordinance, profits tax is charged only on profits arising in or derived from Hong Kong, from a trade, profession or business carried on in Hong Kong.

How does the IRD decide where profits come from?

It applies the operations test: it looks at what the taxpayer has done to earn the profits in question and where it has done it (DIPN 21). As a starting point, service profits come from where the services are performed, and trading profits from where the contracts of purchase and sale are effected.

Can a Hong Kong company with a Hong Kong office claim its profits are offshore?

Only rarely. DIPN 21 quotes the Privy Council that it will only be in rare cases that a taxpayer with a principal place of business in Hong Kong earns profits that are not chargeable. The people who earn the profit generally need to be doing that work outside Hong Kong.

Does having overseas customers make the profits offshore?

No, not on its own. What matters is where the operations that earn the profit are carried out, not where the customer is.

What evidence does an offshore claim need?

Documentary evidence of where the profit-producing operations took place: contracts and correspondence showing who negotiated and concluded the deals and where, travel records, records of where services were performed, and the invoices, shipping and payment documents for each transaction.

What is the FSIE regime?

Since 1 January 2023, certain foreign-sourced income (interest, dividends, IP income and equity disposal gains, with other disposal gains added from 2024) received in Hong Kong by a member of a multinational group is treated as sourced from Hong Kong and taxable unless an exception, such as the economic substance requirement, applies.

Records that support what you claim

Certanta keeps the source document behind every line in your books, so the invoices, contracts and payments an offshore claim relies on are in one place.

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This article summarises section 14 of the Inland Revenue Ordinance (Cap. 112), the IRD's Departmental Interpretation and Practice Notes No. 21 (Revised) and its guidance on the foreign-sourced income exemption, as at 29 October 2026. It is general information, not tax advice. Whether a particular profit is offshore depends on the facts; an offshore claim should be prepared with a tax adviser.