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How to calculate profits tax in Hong Kong

A person who carries on a trade, profession or business in Hong Kong is chargeable to Profits tax on his profits from that trade, profession or business which arises in or derives from Hong Kong.

The tax residence of a person is generally irrelevant for profits tax purposes.

Whether or not a person is carrying on a trade, profession or business in Hong Kong and whether or not income or profits have a Hong Kong source is a question of fact. The mere carrying on of business in Hong Kong is insufficient for a person to be subject to profits tax. The general rule is that profits are sourced where the operations which essentially give rise to the profits take place. The application of this territorial concept has given rise to numerous disputes between taxpayers and the Inland Revenue Department (''IRD''). In July 2012, the IRD issued a revised Departmental Interpretation and Practice Notes No. 21 on the "Locality of Profits" indicating the IRD's views on source of income under different situation. From April 1998, the IRD has provided an advance ruling service on the source of profits.

The assessable profits are computed by taking the profit or loss disclosed in the company accounts and adjusting this for tax purposes. The adjustments would typically include the disallowance of accounting depreciation, and substitution of tax deductible capital allowances. Other disallowances of expenses include domestic or private expenses, expenditure of a capital nature and tax paid under the Inland Revenue Ordinance.

Dividends are generally not subject to profits or withholding tax.


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