However, at a certain point this activity may create a tax presence.
A tax presence means that the local tax authorities consider your business as local enough to tax you — even if you have no legal entity, branch, or registration. In tax treaties this is called a permanent estabishment, but the concept is broader.
If your activities create a tax presence, this can trigger obligations such as:
corporate income tax on locally attributable profits
local bookkeeping and reporting requirements
registration with tax authorities
penalties or retroactive tax assessments if risks are missed
The difficulty is that tax presence is not always obvious.
Many companies assume that “no company” automatically means “no tax”, which is not always correct.
Tax presence risks often arise when a company:
has employees or directors working from another country
uses local sales agents or representatives
carries out long-term projects or on-site activities
operates warehouses or fixed facilities
manages local operations from a home office
Whether these activities create a tax presence depends on how authorities apply these tax rules in practice.
Tax presence questions in Hong Kong are assessed within a territorial tax system. The key authority is the Inland Revenue Department (IRD), which administers profits tax and determines whether profits are regarded as sourced in Hong Kong.
The IRD provides official guidance on profits tax and source of profits (link).
Unlike many jurisdictions, Hong Kong does not rely heavily on the formal concept of “permanent establishment” in domestic law. Instead, the decisive question is whether profits arise in or are derived from Hong Kong.
Hong Kong operates a territorial system of taxation. Only profits arising in or derived from Hong Kong are subject to Hong Kong profits tax, regardless of where a company is incorporated.
The IRD’s long-standing position is that the source of profits is determined by identifying the operations that actually produce the profits and where those operations are carried out. This approach is set out in Departmental Interpretation and Practice Note No. 21 (link).
As a result, Hong Kong tax exposure can arise even without a formal office or entity, if core profit-generating activities are conducted in Hong Kong.
In practice, IRD scrutiny focuses heavily on people-based activity. Where senior management, sales leaders, traders, or deal-makers are based in Hong Kong and perform the key steps that generate profits, the IRD may treat those profits as Hong Kong-sourced.
Typical high-risk activities include negotiating and concluding contracts, setting pricing, approving key commercial terms, managing customers, or exercising regional management control from Hong Kong.
This analysis often produces outcomes similar to a dependent agent PE in OECD countries, even though Hong Kong frames the issue as a “source of profits” question rather than a PE question.
Hong Kong’s dense business environment means that home offices, serviced offices and shared workspaces are common. The IRD does not focus on labels, but on whether the enterprise is effectively carrying on business in Hong Kong through that location.
If a Hong Kong-based individual uses a home office or flexible workspace to conduct core business activities on a regular basis, this can support a finding that profits are sourced in Hong Kong.
Where presence in Hong Kong is incidental, short-term or purely supportive, the risk is generally lower, but documentation of actual activities remains critical.
While Hong Kong retains a separate tax system under the “One Country, Two Systems” framework, there is increasing practical alignment and interaction with mainland China, particularly in cross-border business structures.
Hong Kong has a comprehensive double taxation arrangement with Mainland China, which includes permanent establishment concepts aligned with international standards (link).
In practice, multinational groups operating across Hong Kong and Mainland China face increased scrutiny on how functions are split, especially where Hong Kong is used as a coordination, contracting or invoicing hub for China-related business.
The Greater Bay Area (GBA) initiative integrates Hong Kong with Shenzhen, Guangzhou and other southern Chinese cities. While the GBA offers commercial opportunities, it also increases operational complexity and tax risk.
Businesses using Hong Kong as a base to manage or control activities across the GBA may find that Hong Kong is treated as the place where profits arise, particularly if strategic decisions and contract control sit in Hong Kong.
Official information on the GBA framework is published on the Hong Kong government portal (link).
Hong Kong is a major trading and logistics hub, but it does not operate “free zones” in the traditional sense. Instead, it relies on bonded warehouses and customs control mechanisms.
Pure trading profits may still be regarded as offshore if contracts are negotiated and concluded outside Hong Kong and Hong Kong activities are limited to logistics or support. However, once commercial control shifts into Hong Kong, source analysis often changes.
Scrutiny typically increases where key decision-makers are based in Hong Kong, where sales or trading functions are run from Hong Kong, where Hong Kong personnel approve or negotiate contracts, or where Hong Kong functions as a regional headquarters in practice.
The IRD places significant weight on contemporaneous documentation showing who does what, where decisions are made, and how profits are generated.
If profits are treated as arising in or derived from Hong Kong, they may be subject to Hong Kong profits tax. This can trigger registration, filing obligations and potential back-tax assessments for prior years.
Disputes often focus on factual reconstruction of business processes rather than purely legal arguments.
In Hong Kong, incorporation often becomes the cleaner option once people-based activity is intended to be ongoing, when Hong Kong-based staff are commercially decisive, or when Hong Kong operates as a regional control or contracting hub. At that stage, incorporation typically provides clearer tax boundaries and more predictable compliance.
Across tax systems, the assessment of tax presence typically follows a consistent set of underlying principles:
Substance over legal form
Actual business activities and economic reality carry more weight than contractual labels or formal structures.
People and decision-making
Where key individuals work, negotiate, manage operations or make decisions is often decisive.
Continuity and regularity
Ongoing or recurring activities are treated differently from occasional or incidental involvement.
Economic value creation
Where value is created, managed or controlled is a central factor in tax attribution.
These principles explain why the absence of a legal entity does not automatically eliminate tax exposure.
Tax presence risk is most commonly associated with the following types of activities:
Employees or directors working structurally from another jurisdiction
Sales personnel or agents with decision-making authority
Long-term or recurring on-site projects
Fixed places of business such as offices, warehouses or workshops
Home offices used as a regular base for business operations
The decisive factor is rarely a single activity, but rather the combination, duration and functional role of these activities.
Certain activities are widely regarded as preparatory or auxiliary and typically do not, on their own, create tax presence:
Occasional business travel
Pure marketing or promotional activities
Independent agents acting in the ordinary course of their business
Short-term presence without operational continuity
Supporting functions without decision-making authority
Risk may still arise when these activities evolve or are combined with more substantive functions.