Hong Kong adopts a territorial basis of taxation, whereby Profits Tax is generally chargeable only where a person carries on a trade, profession, or business in Hong Kong and derives profits from that business.

Where this threshold is met, the next consideration is whether the relevant profits are sourced in or outside Hong Kong. Profits derived from activities carried out outside Hong Kong may be eligible for an offshore claim, depending on the specific facts and circumstances.

In practice, offshore claims can arise in a wide range of cross-border business arrangements. Understanding how such claims are reviewed by the Inland Revenue Department (“IRD”), as well as the associated documentation and administrative requirements, is an important aspect of effective tax management in Hong Kong.

An offshore claim is made through the Profits Tax Return, where a business that is considered to be operating in Hong Kong takes the position that some or all of its profits are sourced outside Hong Kong and therefore fall outside the scope of Hong Kong Profits Tax.

In assessing such claims, the IRD focuses on where the actual profit-generating activities are carried out, taking into account the taxpayer’s business model, operational structure, and the manner in which profits are derived.

As a result, offshore claims are highly fact-specific and depend on how a business operates in practice.

Offshore claims may be relevant where a business:

• Deals primarily with overseas customers
• Negotiates or concludes contracts outside Hong Kong
• Conducts manufacturing, logistics, or service activities offshore
• Relies on overseas personnel or group entities to perform key business functions

Even where a business is carried on in Hong Kong, these factors may raise questions as to whether the resulting profits are sourced outside Hong Kong.

Once an offshore claim is made, it is common for the IRD to issue enquiry letters requesting information and documentation to substantiate the claim.

The IRD typically expects:

• Clear explanations of the business model and operational arrangements
• Evidence of where key profit-generating activities are performed
• Contemporaneous documentation supporting the offshore position

Each claim is assessed on its own merits, based on the relevant facts and supporting evidence. Insufficient or inconsistent documentation may significantly reduce the likelihood of a successful claim.

Offshore claims are not fixed and may be reviewed by the IRD at a later stage, even in years where a Profits Tax Return is not issued. Reviews may arise through reissued returns, routine enquiries, or broader tax reviews.

As IRD assessments focus on actual business operations, responding to enquiries can become time-consuming and disruptive if claims have not been properly considered in advance.

Early preparation allows businesses to:

• Assess the relevance of offshore claims to their operations
• Understand the IRD’s review focus
• Prepare appropriate supporting documentation
• Reduce uncertainty and potential disruption during enquiries

A proactive approach enables offshore claims to be managed in a structured and supportable manner, rather than on a reactive basis.

Offshore claims require close alignment between a business’s operational reality and Hong Kong’s territorial tax principles. Our tax team works with businesses to assess when offshore claims may arise, understand how such claims are evaluated by the IRD, and manage the process in a practical, well-supported manner. For tailored advice on offshore tax claims, please reach out to our team.