Hong Kong adopts the territorial source principle, i.e. only profits derived from Hong Kong are taxable in Hong Kong, while profits derived from other places are not subject to profits tax in Hong Kong. In short, even if a limited company is incorporated in Hong Kong, if the company's business profits are not derived from Hong Kong, the company can apply to the Hong Kong Inland Revenue Bureau for "offshore income" at the same time to be exempted from Hong Kong profits tax when filing Hong Kong profits tax.

The determination of the source of profits is determined on the basis of the facts of the case, and there is no general rule that can be applied to all different situations. Whether profits arise in or are derived from Hong Kong is determined by the nature of the profits and the nature of the transactions in question of which they arise.

Therefore, the Hong Kong Inland Revenue Bureau has no clear regulations on what kind of tax arrangements should be made by Hong Kong companies in order to fully comply with the profits tax exemption requirements of "offshore income".