Hong Kong Fact-File Part 2:
Individual Business Domestic Taxation

2.2 Hong Kong Permanent Establishment

In Rule 5 of the Inland Revenue Rules, the tax department describes a permanent establishment as “a branch, management or other place of business, but does not include an agency unless the agent has, and habitually exercises, a general authority to negotiate and conclude contracts on behalf of his principal or has a stock of merchandise from which he regularly fills orders on his behalf “. In other words, a fixed place of business of a permanent nature.

If there is doubt as to whether a business has a permanent establishment in Hong Kong, for example, when business activity is carried out in a number of locations, then various factors are taken into account such as the location of capital, employment of staff, general activity and overall control of the business.

The concept of a permanent establishment is a problematic one for, for example, individuals involved principally in e-commerce activity, given that such activities have traditionally had the advantage of being somewhat ‘portable', for tax purposes; in addition to 'dematerialising' transactions to a certain extent, a company can have various departments in different countries, but connected via the internet, making it difficult for taxing authorities to tell where the ‘main' base of operations is (although this is less likely to be of interest to a smaller business or sole trader). This is especially likely to be an issue in jurisdictions operating a territorial tax system, such as Hong Kong; the authorities will be keen to situate the operation’s income locally, in order to be able to tax it.