Daigou and Group Buy Organisers: Profits Tax Triggers for Overseas Reselling

Disclaimer: 本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 / This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.

The Inland Revenue Department (IRD) has intensified its scrutiny of cross-border e-commerce and parallel trading activities, with a specific focus on the daigou and group-buy sector. This shift, driven by the IRD’s 2025-2026 Field Audit Programme, targets individuals who source goods from overseas markets—primarily Japan, South Korea, and Europe—and resell them to Hong Kong or Mainland Chinese consumers. The key trigger is the territorial source principle of Hong Kong’s Inland Revenue Ordinance (Cap. 112). Many operators mistakenly believe that because they operate from a Hong Kong residence or use a local bank account, their profits are automatically offshore and non-taxable. This is a dangerous assumption. The IRD is now actively matching shipping manifests, payment gateway records, and social media sales data to identify unregistered businesses. The operative position is clear: profits derived from the purchase and resale of goods, where the essential operations (negotiation, contract conclusion, and delivery) occur within Hong Kong, are chargeable to Profits Tax under Section 14(1) of the IRO. For the 2025/26 year of assessment, the standard Profits Tax rate for corporations is 16.5%, and for unincorporated businesses (including sole proprietors), it is 15%. The two-tiered rates apply: the first HKD 2,000,000 of assessable profits are taxed at 8.25% (corporations) or 7.5% (unincorporated). Failure to declare these profits can lead to back-tax assessments covering up to six years, plus penalties of up to 300% of the tax undercharged, as per Section 82A of the IRO.

The Territorial Source Principle: Where Is Your Profit Made?

The IRD’s long-standing position, affirmed in CIR v. HK-TVB International Ltd (1992) and CIR v. Hang Seng Bank Ltd (1991), is that the source of profits is determined by where the operations that produce the profit are carried out, not where the funds are received. For daigou and group-buy operators, this is the single most critical distinction.

The “Operations Test” for Reselling

The IRD applies a two-stage “operations test” to determine the source of profits from trading activities. First, it identifies the operations that produced the profit—typically the purchase and the sale. Second, it determines where those operations were performed. If the taxpayer is in Hong Kong when they negotiate with overseas suppliers, place orders, arrange shipping to Hong Kong, and then sell the goods to local customers (whether via WhatsApp groups, Carousell, or a Shopify store), the profit source is Hong Kong. The profit is therefore subject to Profits Tax.

• Example: A group-buy organiser sources Korean skincare from a Seoul-based wholesaler. The organiser negotiates prices via KakaoTalk from their flat in Mong Kok. Goods are shipped to a Kwai Chung container yard. The organiser then distributes the products to buyers across Hong Kong via SF Express. Result: The profit is sourced in Hong Kong and is fully taxable.
• Counter-Example: An organiser sources the same skincare but instructs the Korean supplier to ship directly to the end customer in Shenzhen. The organiser never takes possession of the goods in Hong Kong, and the contract of sale is concluded between the organiser (acting from Hong Kong) and the Mainland buyer. The IRD may still argue the profit is sourced in Hong Kong because the negotiation and contract conclusion occurred here. The burden of proof falls on the taxpayer to demonstrate the profit is offshore.

The “Onshore vs. Offshore” Claim Trap

Many operators seek to claim their profits are “offshore” (and thus exempt from Profits Tax) by structuring the transaction so that the purchase and sale both occur outside Hong Kong. The IRD’s Departmental Interpretation and Practice Notes (DIPN) No. 21 (Revised) on “Profits Tax: Offshore Claims” is explicit: the claim must be supported by detailed evidence. Mere assertions that goods were sourced and sold overseas are insufficient. The IRD will examine the entire chain of contracts, payment flows, and logistics. For daigou operators, the most common failure point is the “place of sale.” If the customer is in Hong Kong and the product is delivered to a Hong Kong address, the sale is almost certainly onshore. The IRD’s 2024 Field Audit results showed that over 90% of offshore claims by small e-commerce traders were rejected, resulting in full tax assessments plus penalties.

Registration and Filing Obligations for Unincorporated Businesses

The IRO does not distinguish between a formal limited company and an individual running a business as a sole proprietor. If you are carrying on a trade, profession, or business in Hong Kong, you must register with the IRD under Section 51(1) of the IRO.

The “Trade” Threshold for Hobby Sellers

A critical distinction exists between a hobby and a trade. The IRD considers several factors to determine if a person is “carrying on a trade”: frequency of transactions, profit-seeking motive, volume of turnover, and the nature of the goods. A person who sells a few personal items on Carousell each year is unlikely to be considered trading. A person who imports 50 boxes of Japanese vitamins every month and sells them via a dedicated Telegram channel is almost certainly trading. The IRD’s internal guidance, as referenced in the Board of Review decisions (e.g., D17/19), uses a turnover threshold of approximately HKD 50,000 per year as a rough starting point for scrutiny, though no official statutory minimum exists.

• Actionable Trigger: If your monthly sales from daigou or group-buy activities exceed HKD 5,000 consistently for three consecutive months, you should register for Profits Tax. The IRD’s Business Registration Ordinance (Cap. 310) requires registration within one month of commencing business.
• Penalties for Non-Registration: Failure to register a business can result in a fine of up to HKD 5,000 and a daily default penalty of HKD 50. More critically, the IRD can issue a back-tax assessment for all profits earned from the date of commencement, plus penalties under Section 82A.

The Two-Tiered Profits Tax Rate for Sole Proprietors

For the 2025/26 year of assessment, the two-tiered rates are particularly beneficial for small operators. A sole proprietor pays 7.5% on the first HKD 2,000,000 of assessable profits, and 15% on any excess. This is a significant advantage over the standard 16.5% corporate rate. However, this rate only applies if the sole proprietor has not elected for Personal Assessment under Section 41 of the IRO. If Personal Assessment is elected, the profits are aggregated with other income (salary, rental) and taxed at progressive rates (2% to 17% for 2025/26), which may be lower for lower-income individuals. The choice between Profits Tax at the two-tiered rate and Personal Assessment requires a detailed calculation based on total income.

Deductible Expenses and Record-Keeping Requirements

Once a daigou or group-buy operation is classified as a trade, the operator can claim deductions for expenses “wholly and exclusively” incurred in the production of chargeable profits, as per Section 16(1) of the IRO. This is the mirror of the Hong Kong tax system: taxable profits mean deductible expenses.

Common Deductible Items

Operators should systematically track the following expenses, which are generally deductible:

• Cost of Goods Sold (COGS): The purchase price of the goods, including shipping, customs duties, and insurance paid to bring the goods to the point of sale.
• Logistics and Warehousing: SF Express fees, Lalamove charges, storage costs for a mini-storage unit, and packaging materials (boxes, tape, bubble wrap).
• Marketing and Platform Fees: WhatsApp Business subscription, Telegram channel promotion costs, Carousell listing fees, Shopify monthly subscription, and Facebook/Instagram advertising costs.
• Bank and Payment Gateway Fees: PayPal transaction fees, Stripe processing charges, bank transfer fees for overseas payments.
• Home Office Expenses: A portion of rent, utilities, and internet charges if a dedicated space in the home is used exclusively for the business. The IRD accepts a reasonable apportionment, typically based on floor area or time usage. The Board of Review case D10/18 accepted a 15% home office apportionment for a part-time online trader.
• Travel Expenses: If the operator travels to Japan or Korea to source products, the airfare, accommodation, and meals are deductible, provided the primary purpose of the trip is business-related. The IRD will scrutinise mixed-purpose trips; a detailed itinerary and business records are essential.

The Record-Keeping Mandate

Section 51C of the IRO requires every person carrying on a trade or business to keep sufficient records for at least seven years. For daigou operators, this means:

• Purchase Invoices: From overseas suppliers, translated into English or Chinese if necessary.
• Sales Records: A log of each transaction, including customer name (or handle), date, product, quantity, price, and delivery address.
• Bank Statements: All accounts used for the business, including personal accounts if mixed.
• Shipping Documentation: Waybills, customs declarations, and courier receipts.
• Digital Communication: Screenshots of WhatsApp/Telegram orders and payment confirmations.

The IRD has the power to estimate profits and issue assessments under Section 59(3) of the IRO if records are inadequate. In the 2023/24 tax year, the IRD issued over 1,500 estimated assessments to small e-commerce traders, with an average penalty of 20% of the tax undercharged.

The Mainland China Cross-Border Exposure

Daigou operators who sell to Mainland Chinese customers face a second layer of tax exposure, both in Hong Kong and on the Mainland.

Hong Kong Profits Tax on Cross-Border Sales

If a Hong Kong-based daigou operator sells to a customer in Mainland China, the Hong Kong Profits Tax treatment depends on where the contract of sale is concluded. If the operator accepts the order via a Hong Kong phone number or website, and the customer pays into a Hong Kong bank account, the IRD will likely deem the profit source to be Hong Kong. The fact that the goods are shipped directly from Korea to Shenzhen does not automatically make the profit offshore. The IRD’s view, as stated in DIPN No. 21, is that the “place of sale” is where the essential operations of the seller are performed. For a sole proprietor operating from Hong Kong, that is Hong Kong.

Mainland China Individual Income Tax (IIT) Risk

Mainland China residents who purchase goods from a Hong Kong daigou operator may be subject to IIT on the “deemed income” from the transaction, but this is generally not the operator’s concern. However, if the operator uses a Mainland Chinese bank account (e.g., Alipay or WeChat Pay linked to a Mainland ID) to receive payments, the operator may trigger a tax filing obligation in Mainland China. The State Administration of Taxation (SAT) has, since 2020, been cross-referencing cross-border e-commerce payment data. Under the PRC Individual Income Tax Law, a Hong Kong resident who stays in Mainland China for 183 days or more in a tax year is considered a tax resident and must declare worldwide income. For a daigou operator who is physically present in Mainland China for extended periods, the profits from the daigou business could become taxable in Mainland China, even if the business is operated from a Hong Kong address. The US-China Tax Treaty Article 4 (Resident) tie-breaker rules would apply, but this is a complex area requiring professional advice.

Actionable Takeaways

1. Register your daigou or group-buy operation as a business with the IRD under the Business Registration Ordinance (Cap. 310) within one month of generating HKD 5,000 in monthly sales for three consecutive months.
2. Maintain a dedicated business bank account and a digital ledger (e.g., Wave or Xero) to record all purchase invoices, sales receipts, and shipping documents for a minimum of seven years, as required by Section 51C of the IRO.
3. Claim all deductible expenses—including COGS, logistics, marketing, and a reasonable home office apportionment—to reduce your assessable profits, but ensure each expense is supported by a valid receipt or invoice.
4. Do not assume profits are “offshore” simply because goods are sourced from Japan or Korea; if the negotiation, payment, and delivery to the Hong Kong customer occur in Hong Kong, the profit is onshore and fully taxable under Section 14(1) of the IRO.
5. If you receive payments via a Mainland Chinese bank account or travel to Mainland China for more than 183 days in a tax year, seek professional advice on potential Mainland China IIT exposure, as the SAT actively cross-references cross-border e-commerce data.