Do I need to pay taxes when I open an online store in Hong Kong? Do I need to file a tax return? How does the government determine whether an online store needs to pay taxes?
Hong Kong adopts a regional tax system, which means that only income generated in or derived from Hong Kong is subject to Hong Kong's profits tax. Therefore, if companies operating in Hong Kong can prove that their profits come from other countries, they do not have to pay Hong Kong's profits tax.
In other words, under Hong Kong’s tax system, as long as you make a profit from operating a business, and the profit comes from or originates from Hong Kong, you need to pay profits tax. It doesn't matter whether the business is carried out online or physically.
(By the way: It’s not that your business can make more profit without making profits in Hong Kong—if your online store is profitable in other countries, you have the opportunity to pay taxes in that country, such as selling in Malaysia. Need to pay 6% SST to the local government.)
In taxation laws, both "from Hong Kong" and "from Hong Kong" have legal meanings. As far as small, medium and micro enterprises or personal online shops are concerned, as long as the online shops provide services or sell goods in Hong Kong, they are most likely to have to pay profits tax.
According to the current Hong Kong tax regulations, online shops are not covered by the profits tax exemption. Regardless of the form of business operations, they must be registered within one month of starting the business and must also pay taxes. As long as the goods are sold online in a regular and systematic manner, or the goods are bought and then resold to make a profit, they are regarded as "business" and must be declared for profits tax. However, if citizens only occasionally put goods on the Internet for sale, they do not need to file tax returns, but this does not apply to online shops.
It is worth mentioning that since the popularity of online stores after 2010, the tax bureau will take the initiative to review the operation of online stores from time to time, look for online store operators who do not make tax declarations, and then penalize them based on violations. When operating an online store, tax matters are a major focus that cannot be ignored.
On March 27, 2020, the Hong Kong Inland Revenue Department issued a revised version of the Interpretation and Implementation Guidelines No. 39 ("DIPN 39") of the Tax Ordinance, which provides the latest information on Hong Kong's taxation of e-commerce (including online stores and online shopping). In order to determine whether a company’s profits should be subject to Hong Kong profits tax, the Inland Revenue Department will generally review the following three aspects.
First, the Inland Revenue Department will consider whether the company has established a permanent establishment in Hong Kong and determine whether the company operates in Hong Kong in order to collect profits tax. Even if online transactions are carried out online, if the company's main business activities are carried out through the server, the server will be regarded as the company's "fixed place of business", so the shopkeeper still has to pay taxes.
Second, the Inland Revenue Department will consider whether the online shop operates in Hong Kong. For example, if an online shop handles logistics, conducts marketing activities or provides value-added services in Hong Kong, the Inland Revenue Department will consider listing these activities as the "core business" conducted in Hong Kong, and the company may be subject to Hong Kong profits tax at that time.
Third, the Inland Revenue Department will consider the source of e-commerce profits. Since the core business activities of online stores, such as management, virtual store control and logistics support, usually need to be carried out in the actual office space, the tax bureau believes that the key to determining the source of profit is generally the actual office space. Not the location of the server.
Therefore, it is similar to the situation of obtaining a business registration certificate.If you operate a business in Hong Kong for profit, you will most likely need to file a tax return; as to whether or not your online store needs to pay tax in the end, it depends on its profit or loss.
Some online shop owners may be lucky, thinking that if they do not declare, the tax bureau will not find themselves in so many online shops. However, the Inland Revenue Department can search the information of online shops from the Internet and magazines, and can also obtain user information from Internet service providers. In fact, from 2013 to 2014, the Inland Revenue Department has repeatedly asked Internet service providers to disclose their user information. From 2011/12 to 2013/14, the Inland Revenue Department reviewed 3258 online shops. According to the information, the 218 online shops that did not comply with the relevant laws and regulations in the follow-up showed that the Inland Revenue Department is not reluctant to enforce the law in this regard. In addition to proactive investigations by the Inland Revenue Department, citizens can also report to the Inland Revenue Department suspected cases of non-declaration of taxes in online shops. Therefore, shopkeepers should not try to conceal. According to the Tax Ordinance, anyone who deliberately evades tax can be sentenced to a fine of 3 times the tax penalty and 3 years' imprisonment.
All in all, whether an online shop needs to obtain a business registration certificate and file tax returns is similar. As long as you operate a business in Hong Kong for profit, you will most likely need to apply. As for whether the online shop ultimately needs to pay tax, it depends on its profit or loss. If you have any questions about online business tax filing, please consult a professional as soon as possible to avoid falling into the law net by mistake.