In the current digital and technology era, a lot of commerce is conducted online, referred to as eCommerce. Orders for products/services can be placed and processed online, delivered electronically and paid through digital wallets.

Unlike the traditional business under which human activities and physical operations and facilities are heavily involved, technology and automation play important roles and create significant value in the eCommerce business.

From a tax point of view, the question arises on eCommerce tax: where and how is eCommerce business income being taxed?

Relevant eCommerce tax rules

Hong Kong currently does not have any specific provisions to deal with eCommerce tax. Hence, the tax rules applied to the traditional business will also apply to the eCommerce business.

Under the territorial source system adopted by Hong Kong, eCommerce income shall be subject to Hong Kong profits tax if:

• the eCommerce business is carried on in Hong Kong; and
• the resulting business income is arising in or derived from Hong Kong (i.e. sourced in Hong Kong).

The Hong Kong Inland Revenue Department (IRD) has issued the Departmental Interpretation and Practice Notes No. 39 (Revised) (DIPN 39), in which the IRD’s views and assessment practice on, amongst others, eCommerce tax are expressed.

Carrying on an eCommerce business in Hong Kong

In general, if the business core operations or support activities of the eCommerce business are being performed in Hong Kong, such eCommerce business will be regarded by the IRD as being carried on in Hong Kong. 

Business core operations are, for example, network promotion and network infrastructure operation, establishment of links between customers and billing, problem-solving functions, and control and evaluation functions.

Support activities include general management, planning, finance, accounting and legal and quality management.

Source of eCommerce business income

It is sometimes not straightforward to determine the source of eCommerce business income since part, if not most, of the business operations are automated with high involvement of technology, such as servers.

The IRD states in its DIPN 39 that the fact that an operation is automated and carried out through a server located outside of Hong Kong does not necessarily conclude that the source of the income is outside of Hong Kong.

Instead of merely looking at the location of the server and the work done electronically, the IRD will also look into the place where the core operations and support activities required to effect the eCommerce transactions take place.

In addition, certain non-automated functions, such as logistics, marketing, sale functions and after-sale services will also be considered when determining the source of business income for eCommerce tax purposes.

Permanent establishment (PE) created in Hong Kong

According to the DIPN 39, if a person, resident in a foreign tax jurisdiction with which Hong Kong has a double taxation agreement, performs most of the operation and support activities of an eCommerce business outside of Hong Kong, apart from operating merely a server located in Hong Kong with essential and significant activities at the person’s disposal, the server will potentially constitute a PE in Hong Kong. Consequently, the profits attributable to such server could be construed as a permanent establishment and it would be liable to pay Hong Kong profits tax.

One may also have concerns about whether a website and computer equipment will create a PE in Hong Kong. A website, which is a combination of software and electronic data, does not in itself constitute tangible property. Therefore, it does not have a location that can constitute a ‘place of business’ and, hence in general, does not create a PE.

As for computer equipment such as a server, it may constitute a PE if it meets the requirement of being fixed in a particular location, irrespective of whether or not personnel is present in that location.

Having said that, it is still necessary to see the functions carried out by the computer equipment. If the eCommerce operation carried on through the computer equipment is restricted to preparatory or auxiliary functions (instead of essential and significant part of the business activities), one can argue that no PE arises as a result of the presence of the computer equipment.

eCommerce tax in Hong Kong

It is necessary to look into the relevant facts and circumstances of each case when determining the source/taxability of eCommerce business income in Hong Kong.

There are no fixed and fast rules and hence disputes between the IRD and taxpayers sometimes arise. In case your eCommerce business involves crossing borders, it is also necessary to ascertain the tax position in the relevant foreign tax jurisdictions.

In this regard, under the context of international tax, the Action Plan 1 regarding Digital Economy under the Base Erosion and Profit Shifting (BEPS) project implemented by the OECD and the associated Pillar One regarding relocation of taxing rights may be relevant.

HKWJ Tax Law can help

It may not be straightforward when dealing with eCommerce and profits tax in Hong Kong. Please seek advice from a tax consultant or lawyer in order to ensure tax compliance.

At HKWJ Tax Law, we have skilled tax consultants with more than 45 years of combined experience. Our team is always up-to-date on the latest regulation and will gladly advise you on eCommerce tax in Hong Kong. Don’t hesitate to contact us via the form below.