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4.2. Domestic PE of a Foreign Entity

For the purpose of Hong Kong tax liability, taxable profits are those derived by a foreign entity engaged in carrying on a trade, profession, or business in Hong Kong and if the source of profits are in Hong Kong. In that respect, profits arising from Hong Kong are subject to profits tax regardless of PE.

However, additional rules regarding Hong Kong PE are set forth by Inland Revenue Rules and DTA's between Hong Kong and other jurisdictions.

PE Defined by Inland Revenue Rule 5

Permanent establishment (under Hong Kong Law) means a branch, management or other place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of his principal or has a stock of merchandise from which he regularly fills orders on his behalf.

PE under Hong Kong DTA's

The number of double taxation agreements (DTA's) Hong Kong has with other jurisdictions is limited, but has been increasing in recent years. DTA's between mainland China and other jurisdictions do not apply to Hong Kong and vice versa.

The following outlines the key rules pertaining to PE in Hong Kong as per DTA's, which go into greater detail than Inland Revenue Rule 5.

In general, the concept of permanent establishment in Hong Kong is consistent across all DTA's that Hong Kong has with foreign jurisdictions, and is generally in line with the OECD Model. DTA's concluded by Hong Kong dictate that non-resident enterprises located in those jurisdictions will be considered to have PE in Hong Kong (and vice versa) in the following four scenarios:

  • Physical PE
  • Construction PE
  • Agency PE
  • Service PE.

Physical PE

A physical PE is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried out. Although exact terms for what constitutes a fixed place PE vary somewhat between DTA's with Hong Kong, they generally include:

  • A place of management
  • A branch
  • An office
  • A factory
  • A workshop
  • A mine, an oil or gas well, a quarry or any other place of extraction of natural resources.

There is no qualification for the scale or the form of the place of business for the fixed place PE and it will normally have the following features:

  • It must be a place of business
  • It must be a fixed place of business with a certain degree of permanence
  • The enterprise must carry on the whole or a part of its business through this fixed place of business.

Construction PE

A construction PE can take the form of a building site, a construction, assembly or installation project, or related supervisory activities within Hong Kong that last for a period greater than 183 days, 6 months, or 12 months depending on the relevant DTA.

Service PE

A service PE is constituted when a non-resident enterprise furnishes services in Hong Kong, including consultancy services, by the enterprise directly or through employees or other personnel engaged by the enterprise, and the service activities continue for the same or a connected project for a period or periods aggregating more than 183 days or 6 months (depending on DTA) within any twelve-month period.

Agency PE

An agency PE will be constituted when a non-independent agent acts in Hong Kong on behalf of a non-resident enterprise, and has and habitually exercises an authority to conclude contracts in the name of the non-resident enterprise. In addition, if the agent does not have the authority to conclude contracts but takes part in detailed negotiations and formulates contract provisions on behalf of the non-resident enterprise, it will also constitute a PE for the principal.

Independent agents acting on behalf of a non-resident enterprise will not constitute a PE if the agent is acting in the ordinary course of business. However, if the agent is devoted wholly or almost wholly on behalf of the non-resident enterprise it will be considered a PE for the principal. If an agent is conducting activities included in the following list of activities exempt from PE in general, that agent activity will not constitute PE.

General PE Exclusions

The following preparatory or auxiliary activities do not constitute a PE in Hong Kong when engaged in by a non-resident enterprise.

  • A place for storage, display or delivery of goods only
  • A place for maintenance of goods only
  • A place for maintenance of goods to be processed by another enterprise
  • A place for purchasing or advertising goods or for collecting information for the enterprise
  • A place for carrying on an activity of a preparatory or auxiliary character for the enterprise;
  • A place for any combination of the above activities which is of a preparatory or auxiliary character for the enterprise

In addition, a representative office in Hong Kong of a foreign enterprise is not regarded as a permanent establishment on satisfying the following conditions:

  • the activities are for the enterprise itself
  • the activities do not directly generate profits
  • the functions of the representative office are only of a supportive nature.

Online Supply of Products or Services

Hong Kong's Inland Revenue Department (IRD) has taken the position that Hong Kong's existing tax law is neutral in its application to electronic commerce. If all other factors to a transaction remain constant, the tax treatment of an online business transaction will be the same as conventional commerce.