Offshore Profits Claim: What Proof the IRD Expects, and Advance Rulings
The Inland Revenue Department (IRD) expects taxpayers to prove, with supporting documents, that the relevant profit was derived outside Hong Kong. For contracts concluded overseas, assessors may require transaction-by-transaction travel, hotel and subsistence details; for contracts concluded through overseas agents, agency agreements or other supporting evidence may be required. These requirements are described in the IRD’s Departmental Interpretation and Practice Notes No. 21 (Revised), published in July 2012 and checked on 2026-10-01.
What documents should support an offshore profits claim?
The taxpayer carries the evidential burden. The claim should be supported in the tax return by documentary evidence showing the connection between the transaction and the place where its profit was derived.
The evidence should be capable of showing more than the location stated on a contract. The relevant documents depend on how the transaction was carried out:
| Transaction circumstance | Evidence the IRD may expect |
|---|---|
| Contract said to be concluded overseas by a travelling employee | Travel, hotel and subsistence details for each individual transaction |
| Contract said to be concluded through an overseas agent | Agency agreements or other evidence supporting the agency arrangement |
| Profit alleged to arise outside Hong Kong | Supporting documents showing how the profit was derived outside Hong Kong |
The IRD’s DIPN 21 says that assessors require details of travelling, hotel and subsistence expenses for each individual transaction where the contract is claimed to have been concluded overseas. Where overseas agents are involved, the Department says that agency agreements or other evidence will be necessary.
Why can the IRD ask for more information about the transaction?
An offshore-claim return is not the end of the evidential process. Under section 51(4) of the Inland Revenue Ordinance, the Assessor may seek full information regarding any matter that may affect a person’s liability, responsibility or obligation.
The IRD describes a request for detailed information about the “operations” of a transaction as a reasonable demand in an enquiry. In practical terms, the Department may therefore ask for records that help establish where the transaction was performed, how the profit arose and whether the documents support the claimed offshore treatment.
The evidence should be organised around the individual transaction. General descriptions of an overseas activity, without records connecting the activity to the claimed profit, may leave important questions unanswered.
What happens if part of the work is performed in Hong Kong?
Some cases may involve apportionment rather than a wholly offshore or wholly Hong Kong result. DIPN 21 gives service-fee income as an example where services are performed partly in Hong Kong and partly outside Hong Kong.
Where indirect general business expenses contribute to earning both Hong Kong and offshore profits, claims for those general expenses may need to be scaled down. The basis for the scaling must be explained. The Department also states that requests to reopen previous years’ assessments to permit apportionment will not be entertained.
This point is important when building the document set: the analysis may need to address both the income and the relevant expenses, rather than treating an overseas label as sufficient.
Can the claim be designed to shift Hong Kong profits offshore?
The IRD warns that it takes a serious view of schemes and devices intended to “book” Hong Kong profits offshore. It says it will apply the general anti-avoidance provisions where appropriate and may impose penalties in blatant cases involving non-disclosure of relevant facts.
Profits from sales or services to Hong Kong customers generally remain taxable under the position described in DIPN 21. The customer’s location is relevant to the warning, but the broader analysis still depends on the transaction and the evidence supporting where the profit was derived.
Can an advance ruling provide certainty before a transaction?
Yes. The IRD provides advance rulings on the locality of profits to businesses, subject to payment of a fee. The IRD FAQ for non-resident persons other than individuals also states that a company may apply, on payment of an appropriate fee, for an advance ruling under section 88A of the Inland Revenue Ordinance in respect of a contemplated transaction or arrangement.
The advance-ruling route can therefore be considered where a company wants more certainty about the locality treatment of a planned transaction or arrangement. The ruling process does not remove the need to understand the underlying commercial arrangements and supporting evidence.
The advance-ruling fee amount is not stated on the official page in the material reviewed. The amount should therefore not be inferred from DIPN 21 or the IRD FAQ.
What should be checked before submitting the claim?
A useful document review should cover the following points:
- Profit connection: Identify the specific transaction and explain how the profit arose from activity outside Hong Kong.
- Location evidence: Collect records showing where the relevant operations were performed and, where relevant, where contracts were concluded.
- Travelling employees: For each transaction, preserve travel, hotel and subsistence details where the contract is said to have been concluded overseas.
- Overseas agents: Retain agency agreements and other evidence showing the agent’s role and the basis for attributing the transaction to overseas activity.
- Mixed activities: If services or operations occurred partly in and partly outside Hong Kong, prepare an apportionment analysis and explain the treatment of indirect general expenses.
- Disclosure: Ensure the return and supporting documents do not omit facts relevant to the claim.
These are evidence-management points, not a substitute for advice on the particular transaction.
Frequently asked questions
Does an overseas contract automatically prove that the profit is offshore?
No. DIPN 21 requires taxpayers to be ready to prove the claim with supporting documentary evidence. A contract said to have been concluded overseas may lead assessors to request transaction-specific travel, hotel and subsistence details where travelling employees are involved.
What documents are needed when an overseas agent concludes the contract?
The IRD says that agency agreements or other evidence should be provided to support the claim. The documents should help establish the agent’s involvement and the transaction arrangements relied upon.
Can an advance ruling cover a planned transaction or arrangement?
The IRD FAQ says that a company may consider applying for an advance ruling under section 88A of the Inland Revenue Ordinance in respect of a contemplated transaction or arrangement. The service is subject to payment of a fee; the fee amount is not stated on the official page in the material reviewed.
What if services are performed partly in Hong Kong and partly overseas?
DIPN 21 gives this as an example where apportionment may arise. Claims for indirect general expenses contributing to both Hong Kong and offshore profits may need to be scaled down, and the basis should be explained. The Department states that requests to reopen previous years’ assessments to permit apportionment will not be entertained.
What are the risks of trying to book Hong Kong profits offshore?
The IRD says it takes a serious view of schemes and devices intended to book Hong Kong profits offshore. It states that it will apply the general anti-avoidance provisions where appropriate and may impose penalties in blatant cases involving non-disclosure of relevant facts.