Tax residence and fiscal domicilei Corporate residence
Owing to the territorial tax system of Hong Kong, whether profits tax is chargeable under domestic law depends on whether the source of profits is in Hong Kong. As part of the amendments of the IRO to introduce comprehensive transfer pricing rules passed on 13 July 2018, there are further provisions to clarify what constitutes a permanent establishment in Hong Kong, especially with regard to entities resident in jurisdictions with which Hong Kong has not concluded a double taxation agreement (DTA). However, it is important to bear in mind that the territorial principle continues to apply despite the introduction of detailed rules on the definition of permanent establishment.
Whether a person resident in a territory with which Hong Kong has concluded a DTA has a permanent establishment in Hong Kong is to be determined in accordance with the relevant provisions of the DTA concerned.
For a non-DTA territory resident person, it has a permanent establishment in Hong Kong if it has a fixed place of business in Hong Kong through which the business of the enterprise is wholly or partly carried on. Carrying out certain preparatory or auxiliary activities would not constitute having a permanent establishment in Hong Kong. However, the fact the activities carried on does not reach the threshold of a permanent establishment does not necessarily mean that it would not be chargeable to tax in Hong Kong. If the activities carried out constitute carrying on a trade, profession or business within the definition of Section 14 of the IRO, any profits derived from such activities sourced from Hong Kong would nevertheless be taxable profits.