Hong Kong adopts a territorial source principle of taxation. Only profits which have a source in Hong Kong are taxable here. Profits sourced elsewhere are not subject to Hong Kong Profits Tax. The principle itself is very clear but its application in particular cases can be, sometimes, contentious.

To clarify the operation of the principle, Inland Revenue Department prepared a
[ simple guide on the territorial source principle of taxation ].

It gives a brief explanation of how the principle operates and provides simple examples for illustrative purposes of the tests applied to different types of businesses. If you wish to explore the subject in greater depth, consultation with professional advisers is recommended.

Offshore income claim is not automatic. It needs to be applied. Each year, 2 sets of documents needs to be filed to Inland Revenue Department:

In 1., all income (inshore and offshore) of the taxpayer company should be reported.

In 2., taxpayer company can apply for tax exemption of offshore income. Sufficient proof is required which should include:

Offshore income claim involves consideration of all facts. We extracted below cases from the tax department (Inland Revenue Department) to help demonstrating how the rules apply:

There is no single determining factor, but, below will be advantageous:

Having a bank a/c in HK to receive money is not relevant in most cases.

As the Inland Revenue Department will select some transactions and request all the documents relating to these transactions to be submitted to ensure that all the company's operations are carried out outside HK. Therefore you are recommended to keep all the correspondence for all the transactions e.g. faxes, emails, telephone bills, memos of meetings, purchase orders, sales orders, shipping documents.