What Taxes Are My Ecommerce Company’s Profits Subject To?

What Is the Hong Kong Tax System?

The general rule of taxes for all types of businesses

Section 14 of the IRO states that every person who carries on a trade, business or profession in Hong Kong is chargeable to profits tax on the profits arising in or derived from Hong Kong. For ecommerce businesses, when you sell to Hong Kong, you might be taxed.

What Kind of Taxes Applies to Ecommerce Business?

Every country has a different tax system for their ecommerce businesses. In Hong Kong, it comprises 2 components. They are mainly:

• Profit tax
• Sales tax

As a business owner, it’s important to understand how these components work and affect your ecommerce business. We understand taxation can be challenging and at the same time, confusing for many who are either starting a new business venture or have already operated one for a long time. So we break down these components into smaller parts for your reference.

Understanding Sales Tax

Sales Tax vs GST

Sales tax refers to an amount that is charged at the point of sale. It is normally collected by the retailer, or in this case, seller, and later on, passed on the government.

On the other hand, GST stands for Goods and Services Tax. It’s an indirect consumption tax that is usually borne by the consumer, who is the end-user, for his or her purchase.

Now, the good news is, Hong Kong doesn't impose any sales tax or GST! It is no wonder why this city is a shopping destination for many.

Do you have to charge Sales Tax for your e-transactions?

You might be setting up a Woocommerce ecommerce platform for your online store in Hong Kong. First, you plan to sell your products within the city. Slowly, you decide to widen your customer base by implementing international shipping. Now, this is where you might get confused. Should you charge sales tax for international shipping? This is one of the common questions many ecommerce business owners face during the initial phase of setting up their online store.

Since there is no sales tax or GST in Hong Kong, you do not need to include the sales tax during the e-transactions. However, you will need to inform the customers of certain tax regulations in their home country. For instance, they may have to pay tax in their own country when they purchase products from your online store in Hong Kong.

Understanding Profit Tax

Compared to a traditional business setting, ecommerce business does not require a fixed location, or even personnel. As a result, the profits earned can be derived from any parts of the world. Given the nature of business, profits that are subject to tax will be based on the following:

• Permanent Establishment;
• Core operations

However, when it comes to ecommerce business, some things are not as straightforward as John’s case. It’s increasingly challenging to determine what profits are considered taxable, given that some companies may not have a presence in the country but have at least one server in Hong Kong. As a result, IRD updated certain rules in the revised DIPN 39 in 2020.

With the Revision of DIPN 39, How Will This Affect Your Ecommerce Business?

What is DIPN 39?

DIPN 39 stands for Departmental Interpretation and Practice Notes no. 39. It’s a principle guide that applies to electronic transactions and digital assets. The main purpose of this guide is to help ecommerce business owners – be it a local resident or a non-Hong Kong resident - navigate the basis of taxation in Hong Kong. The Inland Revenue Department (IRD) first issued DIPN 39 in July 2001.

What’s changed?

In March 2020, the IRD issued a revised DIPN 39, and this superseded the previous guide in 2001.

Previously, the presence of the server does not count as a permanent establishment. ‘Server’ refers to the source that conducts the main activities of your business. It can be providing information about the products and services to your customers, processing and fulfilling orders, or delivering goods and services electronically, or even processing payments.

However, in the revised DIPN 39, if the main core operations take place in the server, it will be regarded as a permanent establishment. The key thing is, what function does your server play?

What is meant by Core Operations?

You might be wondering what exactly is considered as core operations for your ecommerce business in Hong Kong. DIPN 39 has listed out the core activities as such:

• Logistics – receiving, storing and delivery of goods to the customers.
• Operations include purchasing raw materials, producing your goods and selling it to end-users.
• Marketing and sales, which allows your customers to purchase the product.
• Providing service as a way to maintain the value of the product.

If the core operations are mainly performed in Hong Kong, it will be considered as onshore sourced, regardless where the server is located.

How Do You Calculate Profit Tax for Your Ecommerce Business?

Profits tax in Hong Kong is calculated based on the company's assessable income. You may use this formula to obtain your company’s taxable income.

Looks complicated? All you need is necessary information about your company's assessable and non-assessable profits and other expenses. Apply this formula, and you will get your taxable income.

Once you have your taxable income, apply the appropriate tax rate to determine your profits tax. The current tax rate is 8.25% or 16.5% for corporation’s assessable profits and 7.5% / 15% for unincorporated business.

What About a Non-Hong Kong Resident’s Ecommerce Business, Are Their Profits Taxable?

It depends. There are many ways to look at it. A non-Hong Kong resident might use an Internet service provider in Hong Kong for his or her online shop. If the core operations are performed through this server, his or her profits will be subject to tax.

Now, let’s look at another scenario. If the website is used for information purpose and the core operations are performed through other place, this will not be regarded as a permanent establishment. In this case, he or she will not be subject to tax.

8 Key Takeaways as an Ecommerce Company

1. Ecommerce business comprises three components: Ecommerce tax, Profits tax & Sales tax.
2. Profits from e-transactions are subject to tax based on two major criteria: Permanent establishment and Core operations.
3. In March 2020, Hong Kong issued a revised DIPN 39 that addresses the concerns about the taxation of ecommerce businesses.
4. Previously, a mere presence of a server in the city was not considered as permanent establishment. But now, with the updated guidelines, the presence of a server will be considered as permanent establishment as long as a significant and essential amount of business activity is conducted through this server.
5. A server can be defined as a digital platform, such as website and computer equipment.
6. If a non-Hong Kong resident uses his server to conduct transactions and communicate with his customers but perform his main business operations outside of Hong Kong, the profits are still liable for tax.
7. There is no sales tax in Hong Kong.
8. During e-transactions, you do not have to charge sales tax in your invoice.

Digital economy looks set to grow even more in the coming years, as more companies are turning to digitalisation. As ecommerce businesses thrive, taxation for ecommerce businesses registered in Hong Kong can also prove to be a real headache for many business owners, especially if the tax regulations are revised every other year. But you don’t have to handle it all by yourself. You can contact our experienced team today for advice on tax-related matters.

Renee YangBusiness Writer

Fintech companies, government agencies and private companies, Renee has experience writing for them all. Her writing inspires startups to establish their business and succeed in Asia and Europe. Here at Osome, she helps make running a small business more accessible. Her articles help entrepreneurs succeed in every step of their business journey, covering accounting and bookkeeping advice to tax must-knows. She also has copywriting experience covering branding, website copy, printed publicity collateral, blog articles and interviews.

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