Fundamental Principles and Rules
The charge to profits tax is contained in section 14(1) of the Inland Revenue Ordinance, which states,??
profits tax shall be charged for each year of assessment ? on every person carrying on a trade, profession
or business in Hong Kong in respect of his assessable profits arising in or derived from Hong Kong for that
year from such trade, profession or business ? ?
It lays down three conditions for a charge to tax, namely: 1
(1) the taxpayer must carry on a trade, profession or business in Hong Kong;
(2) the profits to be charged must be ?from such trade, profession or business; and
(3) the profits must be ?profits arising in or derived from Hong Kong.?
The ascertainment of the source of profits is a question of fact, to be judged as a matter of practical reality
in a commercial way.2, and the broad approach is to ask what the taxpayer has done to earn the profits in
question.3 The focus is on establishing the geographical location of the taxpayer?s profit producing
transactions, as distinct from activities that are merely antecedent or incidental to those transactions. 4.
In ascertaining the source of profits, the accurate legal analysis of transactions, or treat contracts and
agreements could not be disregarded.5 What a taxpayer does to earn its profits and where it does so
depends on the nature of the taxpayer?s business.6
1. Commissioner of Inland Revenue v Hang Seng Bank, [1991] 1 AC 306
2. Per Lord Millett NPJ in ING Barings v CIR at paragraph 131 of the judgment
3. Per Lord Jauncey in CIR v HK TVB International [1992] 2 AC 397 at 406G-407C
4. Per Ribeiro PJ in ING Barings v CIR at paragraph 38 of the judgment
5. Kwong Mile Services v CIR (2004) 7 HKCFAR 275 per Bokhary PJ
6. See CIR v Orion Carribbean [1997] 2 HKLRD 924