Is consulting income from overseas clients taxable in Hong Kong

Is Consulting Income From Overseas Clients Taxable in Hong Kong

Taxability hinges on where the services are performed, not where the client is located. Hong Kong charges profits tax only on profits that arise in or are derived from Hong Kong under its territorial source principle. Perform the consulting work entirely outside Hong Kong and the income is generally not taxable, even with an overseas client paying from abroad.

The Hong Kong Territorial Source Principle

Hong Kong’s tax system is built on the territorial source principle. The Inland Revenue Department taxes only profits with a Hong Kong source. For service income, the source is determined by where the services are physically performed. The location of the contract, the client's residence, and the place of payment are secondary factors. The key question is always: where did the consultant do the work?

Offshore Consulting Income Hong Kong

Offshore consulting income in Hong Kong refers to fees earned from work performed entirely outside Hong Kong. A Hong Kong company sending a consultant to Singapore to advise a client there, with all work done in Singapore, generates offshore income not chargeable to profits tax. The company must still report the income on its profits tax return and make an offshore claim to exclude it from assessable profits.

DIPN 21 Hong Kong

The Inland Revenue Department’s guidance on the locality of profits is in Departmental Interpretation and Practice Note 21 (DIPN 21). For service income, DIPN 21 states the place where services are rendered is the decisive factor. The note explains the place of provision of services, contract location, and payment location are all relevant, but the place of performance carries the most weight. DIPN 21 also addresses how to apportion income where services are partly performed in Hong Kong and partly overseas.

Assessable Profits Hong Kong

Assessable profits in Hong Kong are the profits chargeable to profits tax after allowable deductions. If consulting income is determined to be offshore, it is excluded from assessable profits. Work performed in Hong Kong makes the full amount assessable. When a consultant works partly in Hong Kong and partly overseas, the income must be apportioned. Only the portion attributable to work done in Hong Kong is included in assessable profits.

Factors the Inland Revenue Department Considers

The Inland Revenue Department reviews an offshore claim by examining several factors:

• Place of provision of services: Where the consultant physically performed the work. This is the primary factor.
• Contract location: Where the contract was negotiated, signed, and managed.
• Payment location: Where the client remitted the fee.
• Overseas client: The client's residence and business location.
• Connected entity: Whether the consultant has a relationship with the client that might affect the source analysis.

The IRD will also consider whether the consultant maintained an office or other fixed place of business in Hong Kong, and whether any part of the work involved managing or directing the engagement from Hong Kong.

How to Make an Offshore Claim

To exclude consulting income from assessable profits, the company must make an offshore claim. The process involves:

1. Filing the profits tax return (Form BIR51 for corporations) and including a detailed explanation of why the income is offshore.
2. Providing supporting evidence, such as travel records, client contracts showing the place of performance, and correspondence demonstrating where the work was done.
3. The IRD may issue a tax assessment based on the information provided, or may request further details before issuing an assessment.

The claim is made for each year of assessment. If the IRD accepts the claim, the income is excluded from assessable profits and no profits tax is payable on it. If the claim is rejected, the company may object to the assessment.

Practical Considerations

A company earning consulting income from overseas clients should keep clear records of where each engagement was performed. This includes travel itineraries, invoices showing the place of service, and correspondence with the client. Without such records, the IRD may treat the income as Hong Kong-sourced and assess it accordingly.

Provisional tax may still be charged on the full amount of profits, including offshore income, until the IRD processes the claim. The company can apply for a holdover of provisional tax if it expects the offshore claim to succeed.

The two-tiered profits tax rates apply to assessable profits only. If the offshore claim is successful, the lower rate on the first HK$2,000,000 of assessable profits applies only to the Hong Kong-sourced portion.