HK Taxation of E-Commerce and Digital Assets (DIPN 39)

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Hong Kong’s tax system has always been recognised as simple and straightforward,  however, this system has faced challenges in recent years due to the development of the e-commerce industry. On 27 March 2020, Hong Kong’s Inland Revenue Department (“IRD”) issued a revised version of their Departmental Interpretation and Practice Notes No. 39 (“DIPN 39”) to provide updates on Hong Kong’s tax treatment of e-commerce businesses. In this article, we will discuss how DIPN 39 will impact treatment of e-commerce businesses and digital assets.

1. E-Commerce Transactions

Hong Kong utilizes a territorial basis of taxation whereby only income that arises in, or is derived from Hong Kong will be subject to Hong Kong Profits Tax. Therefore, a company that carries on business in Hong Kong but derives profits outside of the city may not be required to pay Hong Kong profits tax on those profits. To determine whether profits are subjectible to Hong Kong profits tax, the IRD will examine the following:

Permanent Establishment

The IRD takes into consideration the presence of a permanent establishment to determine if a company is carrying on a trade, profession or business in Hong Kong for the purposes of charging profits tax. 

Previously, it could be argued that e-commerce transactions should not be subject to tax because the mere presence of a server does not constitute carrying on trade in Hong Kong and does not fully substantiate the presence of a permanent establishment. DIPN 39 revises this interpretation and clarifies what conditions an e-commerce transaction must meet to be subjected to Hong Kong profits tax.

  • A server in Hong Kong utilised by a company can be regarded as a permanent establishment in Hong Kong if an essential and significant part of the company’s business activities are conducted through that server
  • The profits attributable to a Hong Kong based server will be determined by reference to the functions that server performs in Hong Kong and subject to Hong Kong profits tax

In addition, to the extent that a website is stored and accessible on a server, the server may now constitute a “fixed place of business” even if no personnel are required to be on-site to operate the equipment.

Carrying on Business

To determine whether an e-commerce company has been carrying on business in Hong Kong, the IRD will inspect a company’s operations to establish where their core business operations and support activities took place – DIPN 39 lists out the “core operations and support activities” that they consider to be indications of such.

  • Inbound logistics associated with receiving, storing and disseminating inputs to a product
  • Operations associated with transforming inputs into the final product form
  • Outbound logistics associated with collecting, storing and physically distributing the product
  • Marketing and sales associated with providing a means which buyers can purchase the product and inducing them to do so
  • Service associated with providing service to enhance or maintain the value of the product

Locality of Profits

The IRD follows the broad guiding principle of “one looks to see what the taxpayer has done to earn the profit in question,” as a company’s presence in Hong Kong does not necessarily equate to deriving income in Hong Kong. 

E-commerce transactions have been difficult to characterize as chargeable to profits tax as online transactions are conducted online with minimal staff involvement. To identify the locality of profits, DIPN 39 emphasizes the need to interpret the core operations of a business that generates the profits, and where those operations take place. 

  • The location of a server does not determine the locality of profits
  • One must identify the core operations that have influenced the e-commerce transaction to generate the relevant profits, and where those operations took place
  • Activities that have been carried out electronically should not be considered

2. Digital Assets

Digital assets are often misunderstood and are characterised as similar to each other when in reality, each digital asset varies in their functionality and scope of use. DIPN 39 clarifies the view that it is the nature, not the form of a digital asset that determines its tax treatment.

Initial Coin Offerings (“ICO”)

  • ICO’s are a form of funding using cryptocurrencies and the tax treatment on the tokens issued will be determined by that tokens unique attributes
  • For instance, tokens issued for the purpose of granting ownership interests will be considered capital in nature and not subject to Hong Kong profits tax whereas issued tokens which grant holders a right to future benefits will be viewed as taxable

Digital Assets Held For Investments

  • The IRD will refer to, and apply the principle of “badges of trade” in determining whether digital assets held are subjectible to Hong Kong profits tax

Cryptocurrency Businesses

  • For cryptocurrency businesses, the nature of the profits, the operations that generated the profits, and where the profit-generating activities were carried out will be considered

3. Characterisation of Income

DIPN 39 sets rules for determining whether e-commerce payments would be deemed as royalties, specifically if the payments are for the use of, or the right to use a copyright, then the payments would constitute royalties. Any payments that are characterised as royalties, would be deemed as taxable and subject to Hong Kong withholding tax.

4. Transfer Pricing

Transfer pricing refers to the rules and methods for pricing a transaction between related companies. DIPN 39 states that general transfer pricing rules and arm’s length principles apply to e-commerce transactions in the same manner as transactions of tangible assets.


The IRD’s release of the revised DIPN 39 provides welcome clarity to the e-commerce and digital asset industry and helps lay the foundation for these industries to grow. As a licensed Hong Kong CPA firm, the FastLane Group has obtained extensive experience assisting businesses from all industries and we are happy to help with all your audit and taxation needs. Please contact the Fastlane Group for assistance!