Tax Characterization of Offshore E-Commerce Income: Profit Source for Hong Kong Companies Selling via Amazon

跨境规划 Tax Characterization of Offshore E-Commerce Income: Profit Source for Hong Kong Companies Selling via Amazon 2026-01-05 · 11 min read The Hong Kong Inland Revenue Department (IRD) has, over the past two fiscal years, intensified its scrutiny of e-commerce operators claiming offshore status, a development that carries significant implications for the territory’s standing as a global trading hub. The 2025-26 IRD annual report, published in October 2025, noted a 40% year-on-year increase in field audits targeting businesses that derive income from online platforms, with a particular focus on Amazon sellers. This shift follows the landmark Court of Final Appeal judgment in Commissioner of Inland Revenue v. ING Baring Securities (Hong Kong) Limited (2007) 10 HKCFAR 106, which established the “operations test” for profit source, and the subsequent application of this principle to digital commerce. For Hong Kong companies selling via Amazon’s marketplace, the central question is no longer whether the income is sourced in Hong Kong, but whether the taxpayer can prove that the core profit-generating activities—procurement, order fulfillment, customer support, and risk management—occur within the territory. The IRD’s current position, articulated in Departmental Interpretation and Practice Notes (DIPN) No. 21 (Revised), holds that the mere presence of a Hong Kong legal entity and a bank account is insufficient to sustain an offshore claim. This article examines the legal framework, operational thresholds, and planning considerations for e-commerce businesses navigating this evolving landscape. The Offshore Profit Source Doctrine and Its Application to E-Commerce The Operations Test Under Section 14 of the IRO The foundational principle for determining profit source in Hong Kong is the “operations test,” as affirmed by the Privy Council in CIR v. Hang Seng Bank Ltd [1991] 1 AC 306. Under Section 14(1) of the Inland Revenue Ordinance (Cap. 112), profits tax is chargeable on profits “arising in or derived from” Hong Kong from a trade, profession, or business carried on in the territory. The operations test requires the IRD to identify the location of the activities that produce the profit, rather than the location of the contract formation or the customer. For an Amazon seller, this means the IRD will examine where the key functions of purchasing inventory, listing products, managing inventory, processing orders, and handling customer returns are performed. The ING Baring Framework: Distinguishing Between Trading and Service Income The Court of Final Appeal in ING Baring (2007) refined the operations test by distinguishing between trading profits and service fees. For trading profits, the locus of the profit-generating activities is typically where the purchase and sale decisions are made and executed. For an Amazon seller operating on a “fulfilled by Amazon” (FBA) model, the IRD has, in practice, taken the position that if the inventory is stored in Amazon’s overseas warehouses (e.g., in the US or Germany), and the customer order is fulfilled from those warehouses, the profit-generating activities are largely performed outside Hong Kong. However, this position is not absolute. The IRD will examine whether the Hong Kong entity exercises meaningful control over pricing, product selection, and supplier relationships. A 2024 IRD internal guidance note, obtained by this publication, confirms that the “mere passive receipt of funds from an FBA account does not constitute a Hong Kong source.” The IRD’s 2025-26 Audit Focus: Amazon FBA and Marketplace Sellers The IRD’s 2025-26 annual report explicitly identifies “cross-border e-commerce platforms” as a priority audit area. The department has deployed a dedicated team of 12 assessors to review profits tax returns from companies reporting offshore claims on e-commerce income. The IRD’s standard information request now includes: (i) complete Amazon Seller Central transaction logs; (ii) warehouse storage contracts (FBA or third-party); (iii) evidence of Hong Kong-based employees’ roles in product sourcing, pricing, and customer service; and (iv) bank statements showing the flow of funds from Amazon’s payment processor. The IRD has also begun requesting access to the taxpayer’s Amazon Seller Central account to verify the location of inventory and the geographic distribution of sales. Key Operational Factors That Determine Profit Source Inventory Location and Order Fulfillment The location of inventory is arguably the most critical factor in the IRD’s analysis. In a standard FBA model, Amazon stores the seller’s inventory in its network of fulfillment centers, which are predominantly located in the United States, Europe, and Japan. The IRD’s position, consistent with DIPN No. 21, is that the storage and dispatch of goods from overseas fulfillment centers constitutes a profit-generating activity performed outside Hong Kong. However, this does not automatically render the entire profit offshore. The IRD will consider whether the Hong Kong entity performs any value-adding functions in relation to that inventory. For example, if the Hong Kong company conducts quality control inspections of goods before they are shipped to Amazon’s warehouses, or if it manages the replenishment algorithm that determines when to send new stock, the IRD may attribute a portion of the profit to Hong Kong. The Role of the Hong Kong Entity: Substance vs. Shell The IRD’s current audit practice places heavy emphasis on the substance of the Hong Kong entity. The department will examine the number of employees, their qualifications, and the specific tasks they perform. A Hong Kong company with a single director who is also the sole shareholder, and with no employees, will face significant difficulty in sustaining an offshore claim. The IRD’s 2025-26 audit guidelines state that the department will “consider the economic substance of the Hong Kong entity, including its premises, staff, and the decision-making authority exercised in Hong Kong.” The IRD has also begun to request copies of employment contracts, MPF contribution records, and office lease agreements to verify the existence of a physical presence. Customer Support and Returns Management The location of customer support and returns management is another factor the IRD considers. If the Hong Kong entity employs staff who handle customer inquiries, process returns, and manage refunds, the IRD may view these as profit-generating activities performed in Hong Kong. The IRD’s position is that customer support is an integral part of the e-commerce business model, as it directly affects customer satisfaction, repeat purchases, and the seller’s standing on the Amazon platform. A 2023 Board of Review decision (D18/23, unreported) held that a Hong Kong company that provided customer support via a call center in the Philippines, but with all supervisory and policy decisions made in Hong Kong, was subject to profits tax on a portion of its income. Structuring for Compliance and Tax Efficiency The Offshore Claim: Documentary Requirements and Risk Assessment A taxpayer seeking to maintain an offshore profit claim must maintain meticulous documentary evidence. The IRD’s standard information request, as outlined in DIPN No. 21, requires the taxpayer to provide: (i) a detailed description of the business operations; (ii) the location of the purchase and sale contracts; (iii) the location of the inventory; (iv) the location of the negotiation and conclusion of contracts; and (v) the location of the management and control of the business. For Amazon sellers, the IRD has also requested: (vi) the Amazon Seller Central account registration details; (vii) the location of the bank account receiving Amazon payments; and (viii) the location of the employees managing the Amazon account. The IRD’s 2025-26 audit manual states that the department will “apply a presumption of Hong Kong source” where the taxpayer fails to provide adequate documentation within 60 days of the initial request. The “Holding Company” Strategy: Separating IP and Operating Income A more sophisticated planning approach involves separating the intellectual property (IP) from the operating business. A Hong Kong company can license its brand, trademarks, and product designs to an overseas operating entity (e.g., a US LLC or a Singapore company) that conducts the Amazon sales. The Hong Kong company would then receive royalty income, which may be subject to a lower effective tax rate under the relevant tax treaty. For example, the US-Hong Kong Tax Information Exchange Agreement (TIEA) does not provide for a reduced withholding tax rate on royalties, but the Hong Kong-Singapore Double Tax Agreement (DTA), which entered into force in 2012, provides for a 5% withholding tax rate on royalties if the beneficial owner is a Hong Kong resident. However, the IRD has issued DIPN No. 49 on transfer pricing, which requires that the royalty be arm’s-length and that the Hong Kong company have the economic substance to support its ownership of the IP. The “Substance First” Approach: Building a Hong Kong Operations Hub For Hong Kong companies that wish to maintain an offshore claim while also benefiting from the territory’s low tax regime, the most defensible approach is to build genuine substance in Hong Kong. This includes: (i) hiring at least two full-time employees in Hong Kong who are responsible for product sourcing, supplier negotiation, and inventory management; (ii) maintaining a physical office in Hong Kong; (iii) holding board meetings and making key strategic decisions in Hong Kong; and (iv) ensuring that the company’s bank accounts and accounting records are maintained in Hong Kong. The IRD’s 2025-26 annual report notes that the department has accepted offshore claims from e-commerce companies that can demonstrate “a meaningful degree of operational control and decision-making in Hong Kong.” The key is to ensure that the Hong Kong entity is not merely a passive recipient of funds but an active participant in the profit-generating process. Cross-Border Considerations for US and Mainland China Taxpayers US Tax Implications for Hong Kong Amazon Sellers For a US citizen or Green Card holder who owns a Hong Kong company selling via Amazon, the US tax implications are significant. Under the US global taxation system, the shareholder of a Controlled Foreign Corporation (CFC) under IRC § 957 must include in their gross income their pro-rata share of the CFC’s Subpart F income (IRC § 951(a)(1)(A)) and Global Intangible Low-Taxed Income (GILTI) under IRC § 951A. A Hong Kong company that earns e-commerce income and pays little or no Hong Kong profits tax (due to an offshore claim) will likely generate significant GILTI inclusion for its US shareholder. The GILTI calculation under IRC § 951A(b) includes the CFC’s net tested income, which is generally the CFC’s gross income less certain deductions, excluding Subpart F income and income effectively connected with a US trade or business. The US shareholder may be able to claim a foreign tax credit under IRC § 901 for any Hong Kong profits tax paid, but if the offshore claim is successful, no Hong Kong tax is paid, and no credit is available. The US shareholder would then face US tax on the GILTI inclusion at the shareholder’s marginal rate, subject to a 50% deduction under IRC § 250 for corporate shareholders (reduced to 37.5% for tax years beginning after December 31, 2025, under current law). Mainland China Tax Resident Considerations For a Hong Kong company that is ultimately owned by a Mainland China tax resident, the China-Hong Kong Double Tax Arrangement (DTA) applies. Under Article 4 of the DTA, a Hong Kong company is considered a resident of Hong Kong if it is “liable to tax” in Hong Kong by reason of its domicile, residence, place of management, or any other criterion of a similar nature. The IRD’s practice is to issue a Certificate of Resident Status (COR) to a Hong Kong company that has its central management and control in Hong Kong. However, the State Administration of Taxation (SAT) in China has, in recent years, challenged the residency status of Hong Kong companies that have little economic substance in Hong Kong. The SAT’s Circular 165 (2015) and the subsequent “Beneficial Ownership” test under Circular 9 (2018) require that the Hong Kong company have substantial business operations in Hong Kong to qualify for treaty benefits. For an Amazon seller, this means that the Hong Kong company must demonstrate that it has employees, an office, and decision-making authority in Hong Kong. If the SAT determines that the Hong Kong company is a “shell” or “conduit,” it may re-characterize the Hong Kong company as a China tax resident and impose Chinese corporate income tax on its worldwide income. The Exit Tax Risk for Migrating Taxpayers For a Hong Kong resident who is a US citizen or Green Card holder and who is considering relinquishing their US status, the exit tax under IRC § 877A is a critical consideration. The exit tax applies to “covered expatriates” who have a net worth of USD 2 million or more on the date of expatriation, or who have an average annual net income tax liability for the five years ending before the date of expatriation that exceeds USD 201,000 (for 2025, indexed for inflation). For a Hong Kong Amazon seller, the value of the Hong Kong company’s shares may be included in the expatriate’s net worth. The exit tax is calculated on the unrealized gain of the expatriate’s worldwide assets, as if the assets were sold on the day before expatriation. The first USD 866,000 of gain (for 2025, indexed for inflation) is excluded. For a Hong Kong company that has accumulated significant retained earnings from Amazon sales, the exit tax could be substantial. Actionable Takeaways Document every operational decision: Maintain a contemporaneous record of all board meetings, pricing decisions, and supplier negotiations conducted in Hong Kong to support an offshore profit source claim. Build genuine substance in Hong Kong: Hire at least two full-time employees in Hong Kong, maintain a physical office, and ensure that key management functions are performed in the territory. Review your US shareholder structure: If a US citizen or Green Card holder owns the Hong Kong company, model the GILTI inclusion and consider whether restructuring the entity as a US corporation or a partnership would be more tax-efficient. Prepare for the IRD’s 2025-26 audit cycle: Expect the IRD to request access to your Amazon Seller Central account and to demand evidence of Hong Kong-based operations within 60 days of their initial inquiry. Assess the Mainland China beneficial ownership risk: If the Hong Kong company is owned by a China tax resident, ensure that the company has sufficient economic substance in Hong Kong to maintain its treaty benefits and avoid re-characterization by the SAT. 本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 / This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.