Understanding Tax Nexus in Hong Kong’s Digital Economy

For businesses operating internationally, particularly in the e-commerce sector, understanding tax nexus is essential for ensuring compliance in jurisdictions like Hong Kong. Unlike many countries that have introduced specific digital services taxes or value-added taxes, Hong Kong maintains a territorial-based tax system that focuses on where profit-generating activities occur rather than where customers are located.

Hong Kong’s approach to e-commerce taxation is governed by the fundamental principle enshrined in Section 14 of the Inland Revenue Ordinance (IRO): only profits that are sourced in Hong Kong are subject to profits tax. This territorial principle creates unique considerations for online businesses that may serve customers globally while operating from various locations.

What Establishes Tax Nexus for E-Commerce Businesses?

According to the Inland Revenue Department’s (IRD) Departmental Interpretation and Practice Notes No. 39 (Revised) (DIPN 39), the proper approach to determining the locality of profits for e-commerce businesses is to examine “what were the person’s operations which produced the relevant profits and where those operations took place.”

Key Nexus Factors for E-Commerce

The IRD employs a test of fact and degree when determining whether a company is carrying on trade or business in Hong Kong. The following table outlines the critical factors that establish or negate tax nexus:

The Server Location Rule

An important clarification from Inland Revenue Rule No. 5 states that the mere presence of a server in Hong Kong, without human activity to manage it, does not constitute carrying on a business in Hong Kong. The server alone does not constitute a “branch, management, or other place of business,” which implies a physical presence requiring human involvement.

However, the IRD will examine the totality of a person’s business operations in the region. If a server is combined with other activities such as local staff managing the website, inventory stored in Hong Kong, or business decisions made from Hong Kong, tax nexus may be established.

Hong Kong’s Tax Rates and Incentives for E-Commerce

Two-Tiered Profits Tax System

Hong Kong operates a two-tiered profits tax regime that benefits small and medium-sized e-commerce businesses:

• Corporations: 8.25% on first HKD 2 million of assessable profits, 16.5% on remainder
• Unincorporated Businesses: 7.5% on first HKD 2 million of assessable profits, 15% on remainder

For the 2024-2025 tax year, the government announced a proposed 100% reduction in profits tax payable, subject to a ceiling of HKD 1,500, providing additional relief to businesses.

No Digital Services Tax, VAT, or GST

One of Hong Kong’s most significant competitive advantages for e-commerce businesses is the absence of:

• Digital Services Tax (DST): Unlike many jurisdictions globally, Hong Kong has not implemented a DST and currently has no plans to introduce one
• Value-Added Tax (VAT): Not applicable to goods or services in Hong Kong
• Goods and Services Tax (GST): No GST regime exists in Hong Kong
• Capital Gains Tax: Hong Kong does not tax capital gains
• Dividend Withholding Tax: Dividends generated in Hong Kong are not subject to withholding taxes

This simple tax structure makes Hong Kong particularly attractive for digital economy businesses compared to jurisdictions that have implemented DST, such as Austria, Denmark, France, Hungary, Italy, Poland, Portugal, Spain, Switzerland, Turkey, and the United Kingdom.

Business Registration Requirements for E-Commerce

Mandatory Business Registration Certificate (BRC)

All online businesses operating in Hong Kong, including Instagram shops, dropshipping operations, and digital marketplaces, must obtain a Business Registration Certificate within one month of commencing operations. The Business Registration Ordinance (Cap. 310) applies equally whether business is conducted online or through a physical retail location.

According to the IRD’s FAQ on Internet Business, if a person engages in trade or provides services via the internet, and the relevant business operations or services are carried out in Hong Kong, that person must submit an application for business registration.

What Constitutes a “Business” Requiring Registration?

The IRD considers several factors when determining whether online activities constitute a business:

• Scale: Volume and frequency of transactions
• Frequency: Systematic and regular trading activities
• Profit Intent: Activities conducted with profit-making purpose
• Business-like Manner: Professional conduct, advertising, business records

Even dropshipping or Instagram sales count as a business requiring registration if conducted systematically with profit intent, regardless of whether goods are brand-new or second-hand.

Registration Fees and Low Turnover Exemptions

As of April 1, 2025, the government Business Registration fees are:

• One-year certificate: HKD 2,200
• Three-year certificate: HKD 5,720

Fee Exemption for Low Turnover Businesses:

Small business owners may apply for an exemption from paying the levy and business registration fee if average monthly sales or receipts do not exceed:

• HKD 10,000 for businesses mainly deriving profits from the sale of services
• HKD 30,000 for other businesses (trading)

Important Note: Even if eligible for fee exemption, you are still required to apply for business registration. The exemption only waives the fees, not the registration requirement itself.

Application Process

Business registration can be completed online via the eTAX portal in 10-20 minutes. Businesses do not need a physical office but must provide a registered business address in Hong Kong. Many entrepreneurs use professional company secretary services that include a local address.

Compliance Requirements Checklist

2025 Regulatory Updates Affecting E-Commerce

Business Tax Portal (BTP) Launch – July 2025

The IRD is launching the Business Tax Portal (BTP) in July 2025, alongside the Individual Tax Portal and Tax Representative Portal (TRP). These digital platforms will provide enhanced e-filing services and digitalized tax reporting capabilities for taxpayers and tax representatives.

Mandatory E-Filing Timeline

Hong Kong is phasing in mandatory electronic filing of Profits Tax Returns according to the following roadmap:

• 2025/26: All in-scope multinational enterprise (MNE) groups with Profits Tax filing obligations must e-file
• 2028: Mandatory e-filing for businesses exceeding a turnover threshold (specific amount to be confirmed)
• 2030: All companies, including dormant entities, will be required to e-file

E-commerce businesses should prepare their accounting systems and processes to support electronic filing ahead of the applicable deadline.

OECD Pillar Two Global Minimum Tax – Effective January 2025

Hong Kong has implemented the OECD’s global minimum tax (Pillar Two) for fiscal years starting from January 1, 2025. This affects multinational enterprise groups with annual consolidated revenue of at least EUR 750 million.

Key implications for qualifying e-commerce businesses:

• Minimum Effective Tax Rate: 15% global minimum tax applies
• Top-Up Tax: May be required if effective tax rate falls below 15% in any jurisdiction
• Profit Allocation: Careful allocation of profits across jurisdictions becomes critical
• Additional Reporting: Enhanced country-by-country reporting requirements

While this primarily affects large multinational groups, smaller e-commerce businesses that are part of or acquired by larger groups should be aware of these requirements.

Common E-Commerce Business Models and Tax Treatment

Dropshipping from Hong Kong

If you manage a dropshipping business from Hong Kong (coordinating suppliers and customers, handling customer service, making business decisions), your profits are likely Hong Kong-sourced and subject to profits tax, even if products ship directly from overseas suppliers to customers.

Cross-Border E-Commerce Platform

Operating a platform that connects buyers and sellers requires examining where the platform’s core operations occur. If platform management, technology development, and key decisions occur in Hong Kong, profits may be Hong Kong-sourced. Simply hosting servers in Hong Kong without other activities is generally insufficient to create nexus.

Digital Services and Software Sales

Selling software, digital downloads, or online services to customers worldwide from Hong Kong means profits are generally Hong Kong-sourced if the development, maintenance, and business operations occur in Hong Kong. The location of customers is not determinative – what matters is where the profit-generating activities take place.

Marketplace Selling (Amazon, eBay, etc.)

Using third-party platforms like Amazon or eBay does not, by itself, determine tax nexus. The analysis focuses on where your business operations occur: inventory management, customer service, marketing decisions, and supplier negotiations. If these activities are conducted from Hong Kong, profits are likely Hong Kong-sourced.

Penalties for Non-Compliance

E-commerce businesses should take compliance seriously, as penalties for violations can be significant:

• Failure to Obtain Business Registration: Prosecution may be brought, resulting in fines and potential criminal liability
• Late Filing of Tax Returns: Penalties and surcharges apply
• Incorrect Returns: Additional tax assessments plus penalties
• Failure to Keep Proper Records: Fines up to HKD 100,000 and possible prosecution

The IRD has enhanced enforcement capabilities and increasingly focuses on e-commerce businesses to ensure proper compliance with registration and tax obligations.

Practical Recommendations for E-Commerce Businesses

Document Your Operations

Maintain detailed documentation showing where your profit-generating activities occur. This is critical for determining source of income and supporting any claims that profits are offshore. Document employee locations, where decisions are made, inventory management locations, and operational activities.

Structure Appropriately

Most e-commerce businesses choose to incorporate as a Private Limited Company due to credibility, limited liability protection, and ease of opening business bank accounts. While minimum share capital is HKD 1, most founders choose HKD 1,000 or more for credibility and flexibility.

Seek Professional Advice

Given the fact-specific nature of determining tax nexus and source of income, e-commerce businesses should consult with qualified tax advisors familiar with Hong Kong tax law and the IRD’s interpretations, particularly DIPN 39. This is especially important for businesses with cross-border operations.

Plan for Digital Transformation

With mandatory e-filing approaching, invest in cloud-based accounting systems that can integrate with the IRD’s digital portals. This will streamline compliance and reduce administrative burden as electronic reporting becomes required.