New trends in e-commerce taxation in Hong Kong: Coping with the transformation of the digital economy
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Written by Michael Wong, CPA
Reviewed by TAX.hk Editorial Team
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Business Tax Guide
Hong Kong's Updated Tax Position on E-Commerce: Addressing the Digital Economy Shift
📋 Key Takeaways
Territorial Source Principle of Taxation: Profits tax is levied only on profits arising in or derived from Hong Kong, with offshore profits eligible for a 100% exemption.
No Sales Tax / VAT: Hong Kong does not levy any form of sales tax or Value-Added Tax (VAT) on digital services or e-commerce transactions.
Two-Tiered Profits Tax Rates: For corporations, the tax rate is 8.25% on the first HK$2 million of assessable profits and 16.5% on the remaining profits (for 2024-25).
Departmental Interpretation and Practice Notes No. 39 (Revised 2020): The Inland Revenue Department determines the locality of profits based on the location of "core business operations" rather than server location.
OECD Pillar Two: The global minimum tax rate (15%) is effective from January 1, 2025, applying to multinational enterprise groups with global revenues of €750 million or more.
Business Tax Portal: Launched in July 2025 to provide enhanced digital tax services for enterprises.
Imagine running a global e-commerce business where your international profits are subject to zero tax. This is not a tax haven fantasy, but a reality for many digital enterprises based in Hong Kong. As the digital economy reshapes global business models, Hong Kong's territorial source principle of taxation provides e-commerce entrepreneurs with a distinct competitive edge. Coupled with the Inland Revenue Department's updated guidance under Departmental Interpretation and Practice Notes No. 39 (Revised 2020) and recent digital compliance initiatives, understanding Hong Kong's e-commerce tax framework has never been more critical for businesses seeking a competitive advantage in the digital marketplace.
Hong Kong's Territorial Source Principle of Taxation: The Cornerstone of E-Commerce Success
Hong Kong adopts the territorial source principle of taxation, meaning profits tax is only levied on persons carrying on a trade, profession, or business in Hong Kong in respect of their assessable profits arising in or derived from Hong Kong. This fundamental principle creates substantial opportunities for e-commerce businesses that strategically structure their operations.
How Is It Determined Whether Profits "Arise in or Derive from Hong Kong"?
Under Departmental Interpretation and Practice Notes No. 39 (Revised) (DIPN 39), the Inland Revenue Department adopts a pragmatic approach to determine the source of profits for e-commerce businesses:
Core Operations Test: Focuses on identifying what the operations are that produce the relevant profits and where those operations are performed.
Beyond Server Location: The location of servers or automated systems alone is not determinative of the source of profits.
Business Activity Analysis: Both core business operations and supporting activities must be examined.
Substance over form: The Inland Revenue Department (IRD) examines the economic substance of a transaction, rather than merely its electronic mode of execution.
💡 Pro Tip: If your e-commerce profits are generated from core business activities carried out outside Hong Kong, these profits may be 100% exempt from profits tax. For example, a Hong Kong-incorporated company operating an Amazon FBA business that imports goods from China and sells exclusively to US customers may qualify for an offshore profits claim if all its core operations are performed outside Hong Kong.
The IRD originally issued Departmental Interpretation and Practice Notes (DIPN) No. 39 in July 2001 to clarify the tax treatment of electronic commerce. In March 2020, the IRD released a comprehensive revised version to address modern business models, including online marketplaces, dropshipping, Software-as-a-Service (SaaS) platforms, digital assets, cloud computing, and cross-border digital services.
Core Business Operations vs. Support Activities
DIPN 39 (Revised) distinguishes between two categories of business functions:
Core Business Operations
Support Activities
Online promotion and marketing
General administration
Operation of network infrastructure
Planning and strategy
Customer relationship management
Finance and accounting
Payment processing and billing management
Legal and compliance
Problem resolution and customer service
Quality management
Sales and order fulfillment
Human resources
Monitoring and evaluation functions
Administrative functions
Key Principle: If core business operations are conducted in Hong Kong, the e-commerce business is generally considered to be operating in Hong Kong, and its profits are deemed to be Hong Kong-sourced. Mere support activities usually do not constitute Hong Kong-sourced income.
Hong Kong's two-tiered profits tax rates regime, implemented since 2018, offers preferential tax rates for small and medium-sized enterprises:
Entity Type
First HK$2 Million
Portion Exceeding HK$2 Million
Corporations
8.25%
16.5%
Unincorporated Businesses
7.5%
15%
⚠️ Important Note: Only one entity per connected group can benefit from the two-tiered tax rates. The offshore profits tax rate is 0% (fully exempt from Hong Kong tax), and Hong Kong does not levy capital gains tax on the sale of assets.
OECD Pillar Two: Impact of Global Minimum Tax on E-Commerce
Hong Kong has implemented OECD Pillar Two, introducing a 15% global minimum tax rate effective from January 1, 2025. This will impact multinational enterprise (MNE) groups with global consolidated revenues exceeding EUR 750 million.
Key Features of Hong Kong's Implementation Plan
Income Inclusion Rule (IIR): Effective from January 1, 2025.
Hong Kong Minimum Top-up Tax (HKMTT): Ensures that Hong Kong-based entities pay an effective tax rate of at least 15%.
Legislation: Passed on June 6, 2025, taking effect from January 1, 2025.
Pillar Two Platform: To be launched in January 2026 for filing tax returns and notifications.
⚠️ Important Note: Small and medium-sized e-commerce enterprises (below the EUR 750 million threshold) are not affected by Pillar Two. Only large multinational e-commerce platforms must ensure that their global effective tax rate is no less than 15%.
All e-commerce businesses operating in Hong Kong—including online shops, dropshipping businesses, and social media stores—must obtain a Business Registration Certificate within one month of commencing business.
Launch of the Business Tax Portal (BTP)
With the rollout of the Business Tax Portal (BTP) in July 2025, e-commerce enterprises face more comprehensive digital compliance requirements:
Digital Records: Maintain electronic accounting records and supporting documents.
Multi-User Access: The BTP provides a multi-user platform for enterprises to manage tax affairs.
Real-Time Updates: File tax returns, view assessments, and pay taxes through an integrated platform.
Audit Trail: Maintain complete records of all transactions, which is particularly crucial for claiming offshore profit exemptions.
Arrange core profit-generating business activities to be carried out outside Hong Kong.
Use the Hong Kong office solely for regional management and administrative functions.
Properly document the locations of all key business activities.
Be prepared with documentation such as contracts, correspondence, and travel records to substantiate offshore profit claims.
2. Business Model Optimization
Consider where goods are sourced, stored, and shipped from.
Evaluate the locations of customer service and technical support.
Review where marketing and customer acquisition activities are conducted.
Examine the placement of servers and technical infrastructure (Note: this factor alone is insufficient to determine the source of profits).
Common Pitfalls to Avoid
Insufficient Documentation: Failing to maintain evidence supporting offshore profit claims.
Substance Inconsistent with Form: Claiming offshore status when key personnel and operations are based in Hong Kong.
Over-Reliance on Server Location: Assuming that server location alone determines the source of profits.
Transfer Pricing Non-Compliance: Related-party transactions are not conducted at arm's length.
Late or Incorrect Filing: Missing filing deadlines or providing incomplete information.
✅ Key Takeaways
Territorial Advantage: Hong Kong's territorial source principle of taxation allows e-commerce businesses to operate tax-free on genuinely offshore profits.
Core Operations Rule: The source of profits depends on where the core revenue-generating operations take place—not the server location or electronic execution methods.
No Sales Tax/VAT Burden: Compared to most jurisdictions, Hong Kong has no VAT or sales tax, eliminating a major cost burden.
Competitive Tax Rates: The two-tiered profits tax regime (8.25% on the first HK$2 million, 16.5% thereafter) benefits SMEs.
Documentation is Crucial: Properly maintain records of operational locations—the Inland Revenue Department assesses substance over form.
Digital Compliance: The launch of the Business Tax Portal in July 2025 marks Hong Kong's transition to comprehensive digital tax administration.
Pillar Two Impact: Only multinational e-commerce groups with global consolidated revenues exceeding EUR 750 million are required to comply with the 15% global minimum tax rate starting from 2025.
Strategic Structuring: Proper business structuring and location planning can yield significant tax savings while maintaining full compliance.
Hong Kong's e-commerce tax framework provides digital enterprises with one of the most competitive business environments in the world. By understanding the principles of Departmental Interpretation and Practice Notes (DIPN) No. 39 (Revised), leveraging the territorial source tax advantages, and maintaining proper documentation, e-commerce entrepreneurs can build scalable global businesses and achieve optimal tax efficiency. As digital compliance requirements continue to evolve with the Business Tax Portal and global tax reforms, staying informed and seeking professional advice will ensure your e-commerce business thrives in Hong Kong's dynamic commercial landscape.
📚 Sources
The content of this article has been verified against official Hong Kong Government data and authoritative references:
Last updated: December 2024 | The information in this article is for general reference only. Please consult a qualified tax professional for specific questions.
