Offshore Trading Claims in Hong Kong: Contract Places, No Apportionment
Under DIPN 21, an offshore trading claim cannot be decided solely from where the contracts were made: the Inland Revenue Department examines the relevant trading operations. Trading profits are wholly taxable or wholly non-taxable, with no apportionment merely because some activities took place overseas. The source is Hong Kong’s Inland Revenue Department, Departmental Interpretation and Practice Notes No. 21 (Revised), published in July 2012 and checked on 2026-10-01.
What does the IRD examine for trading profits?
The IRD looks beyond the wording of the contracts and considers how the business actually operated. For trading in goods, its questions include:
- How the goods were procured and stored
- How sales were solicited
- How orders were processed
- How the goods were shipped
- How financing was arranged
- How payment was effected
These operational factors help determine the geographical source of the profits. They do not replace the separate contract-place rules; they explain why the place of contracting alone may not settle the analysis.
Source: Hong Kong Inland Revenue Department, DIPN 21 (Revised), published July 2012; checked 2026-10-01.
Why does the place where the contract was made not decide the claim?
A contract may be concluded by letter, fax or email. In that setting, its legal place of formation can be accidental rather than a reliable indicator of where the trading activity was carried on. The IRD therefore does not look only at the place of contract when determining the geographical source of profits.
Source: Hong Kong Inland Revenue Department, DIPN 21 (Revised), published July 2012; checked 2026-10-01.
How do the purchase and sale contract places affect the result?
DIPN 21 states the following general outcomes for trading in goods:
| Where the purchase and sale contracts are effected | Treatment stated in DIPN 21 |
|---|---|
| Both in Hong Kong | The profits are fully taxable |
| Both outside Hong Kong | No part of the profits is taxable |
| Either one in Hong Kong | The initial presumption is that the profits are fully taxable |
These are the outcomes stated in the July 2012 note, checked on 2026-10-01. The final assessment still requires the relevant facts and operations to be examined.
Source: Hong Kong Inland Revenue Department, DIPN 21 (Revised), published July 2012; checked 2026-10-01.
Do Hong Kong customers or suppliers automatically establish a Hong Kong contract?
A sale to a Hong Kong customer will usually be treated as a contract effected in Hong Kong. This includes a sale to the Hong Kong buying office of an overseas customer.
Likewise, purchasing goods from a Hong Kong supplier or manufacturer will usually mean that the purchase contract was effected in Hong Kong.
The IRD’s wording is “usually taken as” or “will usually be taken as.” It states a practical rule but does not present either situation as an exceptionless rule for every transaction.
Source: Hong Kong Inland Revenue Department, DIPN 21 (Revised), published July 2012; checked 2026-10-01.
Can overseas activity support an apportionment of trading profits?
No. The IRD’s position under DIPN 21 is that trading profits are either wholly taxable or wholly non-taxable. There is no room to substitute a mixed source for a Hong Kong source merely because some activities occurred overseas.
This is an all-or-nothing treatment of the relevant trading profits. It does not mean that every separate receipt, entity or activity is automatically classified in the same way. For example, commission earned by a Hong Kong subsidiary or agent for services performed in Hong Kong is fully taxable.
Source: Hong Kong Inland Revenue Department, DIPN 21 (Revised), published July 2012; checked 2026-10-01.
What happens when a Hong Kong buying office buys goods for an overseas trader?
A Hong Kong branch, subsidiary or agent that is confined to purchasing goods or collecting information for an overseas trading company, and does not participate in the sales, does not create a Hong Kong profits tax liability for that activity under the example given in DIPN 21.
The buying activity must remain distinct from participation in the sales. Any commission or other remuneration earned by the subsidiary or agent for performing its services in Hong Kong is fully taxable.
Source: Hong Kong Inland Revenue Department, DIPN 21 (Revised), published July 2012; checked 2026-10-01.
Which facts should be checked before treating a claim as offshore?
The analysis should address the complete trading operation, including:
- Where the purchase and sale contracts were effected.
- Whether a Hong Kong customer, supplier or manufacturer was involved.
- How the goods were procured, stored and shipped.
- How sales were solicited and orders were processed.
- How the business was financed and payments were effected.
- Whether the Hong Kong entity was only purchasing goods or collecting information, or also participated in sales.
- Whether the Hong Kong entity earned commission or other remuneration for Hong Kong services.
DIPN 21 provides the governing analysis for these matters but does not by itself decide the result of every transaction.
Frequently asked questions
Does having overseas customers make trading profits non-taxable in Hong Kong?
No single fact such as an overseas customer determines the result. The IRD examines the relevant operations as well as the places where the purchase and sale contracts are effected. Trading profits remain subject to the wholly taxable or wholly non-taxable treatment described in DIPN 21, with no apportionment simply because some activities were overseas.
Is an email contract necessarily effected where the email was sent?
DIPN 21 does not treat the contract’s legal place of formation as conclusive. The IRD notes that a contract concluded by letter, fax or email may be formed in a fortuitous place, which is why it considers the wider trading operations.
Can a Hong Kong buying office claim the same treatment as the overseas seller?
DIPN 21 gives an example in which a Hong Kong branch, subsidiary or agent confined to buying goods or collecting information for an overseas trading company, and not involved in sales, does not create a Hong Kong profits tax liability for that activity. Commission or remuneration for services performed in Hong Kong remains fully taxable.
Can part of a trading profit be excluded as overseas income?
Not merely because some activities were overseas. Under the IRD’s approach in DIPN 21, trading profits are wholly taxable or wholly non-taxable; the note does not provide for replacing a Hong Kong source with a mixed source.