In Hong Kong, profits tax is an income tax chargeable to business carried on in Hong Kong. Applying the territorial taxation concept, only profits sourced in Hong Kong are taxable in general. Capital gains are not taxable in Hong Kong, although it is always arguable whether an income is capital in nature. The persons chargeable to profits tax includes corporations, partnerships, trustees, and sole proprietors. Chargeable scope As a general rule, Hong Kong profits tax is levied on any persons who carries on a trade, profession or business in Hong Kong and assessable profits arising in or derived from Hong Kong for a year of assessment. The profits tax rate applied is 15% for individuals and 16.5% for corporations (a.k.a. the standard rate) on their net assessable profits for the year of assessment 2014/15. Source of profits To argue whether profits arising in or derived from Hong Kong, case law judgments are often referred. The fundamental source rule was laid down by the landmark case The Commissioner of Inland Revenue ("CIR") v. Hang Seng Bank Ltd Co. (1991) 1 AC 306. Lord Bridge of Harwich of Privy Council held that the source of profits is a question of fact depending on the nature of transaction and stated the broad guiding principle in determining the source is that The statement is widely retrieved in the context of Taxation in Hong Kong and other jurisdictions and reconfirmed in subsequent cases, such as HK-TVB International Limited v. CIR (1992) 2 AC 397. However, while applying the broad guiding principle, it should not be distracted by the antecedent and incidental matters. To reduce the complexity in determining the source of profits, the Inland Revenue Department of Hong Kong ("IRD") issued Departmental Interpretation and Practice Note No. 21 - Locality of profits ("DIPN no. 21") to provides potential taxpayers a guideline on the source of income. Following the guideline in DIPN no, 21, the taxpayers may first determine what kinds of profits do their business earn and make reference to the IRD's views in respect of the particular type of profits. Tax computation The formula is: HK profits tax payable = Net assessable profit × Profits tax standard rate Net assessable profit = Assessable profit − Loss brought forward (if any) + Loss transferred from partnership (if any) Assessable profit = Profit or (Loss) per financial account + (Disallowable expenses charged in account − Non-taxable