Is foreign income taxable in Hong Kong

Is Foreign Income Taxable in Hong Kong

No. Foreign-sourced income is generally not taxable in Hong Kong under the territorial source principle. The Inland Revenue Department only taxes profits that arise in or are derived from Hong Kong, regardless of where the taxpayer is resident. The key exception is the Foreign-Sourced Income Exemption (FSIE) regime, which applies to certain income received in Hong Kong by members of multinational groups.

The Territorial Source Principle

Hong Kong's tax system follows the territorial source principle. A company is assessed on profits that arise in or are derived from Hong Kong. Profits sourced outside Hong Kong are not chargeable. The Inland Revenue Department's guidance on this principle is set out in Departmental Interpretation and Practice Note 21 (DIPN 21), which explains how to determine the locality of profits.

To claim income is offshore and therefore not chargeable, a company must demonstrate the operations generating the profits were performed outside Hong Kong. The burden of proof rests with the taxpayer. A company that has filed its profits tax return without claiming an offshore treatment may later submit an offshore claim supported by evidence of the business activities and where they occurred.

The Foreign-Sourced Income Exemption Regime

The FSIE regime took effect on 1 January 2023 and was expanded from 1 January 2024 to cover disposal gains. It applies to foreign-sourced income received in Hong Kong by a member of a multinational group. Under the regime, such income is chargeable to profits tax unless an exception applies. The three main exceptions are the economic substance requirement, the nexus requirement for intellectual property income, and the participation exemption.

A company not part of a multinational group is not subject to the FSIE regime and continues to rely on the territorial source principle alone. The FSIE regime does not affect the taxation of foreign-sourced income received by individuals or by companies that are not members of a multinational group.

Hong Kong Offshore Income Tax Claims

A taxpayer who considers their foreign-sourced income is not chargeable may file an offshore claim. The claim must be supported by evidence showing the core income-generating activities took place outside Hong Kong. The Inland Revenue Department will examine the facts, including where contracts were negotiated and concluded, where staff were based, and where decisions were made.

A successful offshore claim results in the income being treated as offshore and not subject to Hong Kong taxation. If the claim is unsuccessful, the income is assessed at the standard corporation profits tax rate or the two-tiered rate if the company qualifies.

Taxation of Overseas Income Hong Kong

The treatment of overseas income depends on the nature of the income and the status of the recipient. Dividends, interest, and disposal gains received by a multinational group member in Hong Kong are subject to the FSIE regime. For such a company, the economic substance exception requires the company to have adequate staff and premises in Hong Kong to carry out the relevant business activities.

The participation exemption applies to dividends and disposal gains from a substantial shareholding in a foreign subsidiary. To qualify, the Hong Kong company must hold at least 5% of the shares in the foreign entity and meet certain conditions, including that the foreign entity is subject to a tax of a similar nature in its jurisdiction.

Companies not part of a multinational group do not need to meet the FSIE conditions. Their foreign-sourced income remains not chargeable under the territorial source principle, provided the source is genuinely outside Hong Kong.

Practical Steps for Foreign-Sourced Income

A company receiving foreign-sourced income should first determine whether it is a member of a multinational group. If it is, the company must assess whether an FSIE exception applies to the income. If it is not, the company should document the offshore nature of its operations to support any future claim that the income is not taxable.

Maintain records of where business activities are conducted. These include contracts, invoices, correspondence, and evidence of staff locations. These records support any claim that the income is offshore and not chargeable.