Source of income

Classify the receipt before locating it

Source rules determine a tax connection between an income stream and a place. Employment, services, dividends, interest, royalties, property income and business profits can follow different rules. Begin with the legal and commercial character of the receipt, then apply the relevant country’s sourcing rules.

The IRS explains that personal-service income is generally sourced where the services are performed, rather than where the contract is signed or payment received. That is a useful U.S. example, not a rule to copy unchanged into every other country’s tax system.

How the analysis fits together

Begin by classifying the income. Employment, independent services, trading profits, dividends, interest, royalties and gains can have different source rules. A single company may receive several categories in the same year. Customer location, payment currency and the bank receiving the funds may be relevant facts, but none is a universal source test for every category.

The issue is especially important in territorial systems and special foreign-income regimes. A person may do work while physically present in the destination and be paid by an overseas customer. That description does not itself establish foreign-source treatment. The analysis needs the applicable provision, the income-producing activity and any statutory deeming or exemption rule. Withholding and treaty relief then need separate consideration.

Assessment sequence

This is a review framework. The applicable domestic provisions and any relevant treaty determine the result in a particular case.

The founder’s common blind spot

Imagine a consultant living and working in country A, invoicing through a company in B and receiving money from customers in C. The three locations do not tell us the complete answer. Analyse the consultant’s remuneration, the company’s profit, where the work and management occur, and any business presence separately.

A digital product can require another inquiry: what is supplied, which party owns the rights, whether the payment is for access, services or licensed intellectual property, and which activities earn the profit. Describing every online receipt as foreign passive income can conceal the very facts that determine taxation.

Territorial systems still require analysis

Hong Kong’s official source guidance uses a factual operations approach for business profits: identify the profit-producing operations and where they occur. Its current foreign-sourced-income exemption framework adds separate rules for specified income received by relevant multinational-group entities. An old territorial-tax slogan does not capture the full current position.

A remittance rule also asks a different question from a source rule. The origin of income and what happens when money is brought into a jurisdiction must be examined separately. Keep an income schedule that distinguishes the taxpayer, category, source, receipt date and subsequent movement.

Translate the conclusion into records

Collect contracts, work locations, timesheets where relevant, invoices, ownership records, platform terms and evidence of the underlying operations. Where activities span countries, determine whether an allocation is required and how it can be substantiated. The location shown on a payment processor’s statement may not identify the economic payer or the activity.

We can review an existing income model or a proposed structure, connecting source with personal residence, company residence, treaties and permanent establishments. The useful result is a documented explanation of each significant revenue stream and a practical way to maintain the evidence as the business grows.

Common misunderstandings

• A foreign payer does not necessarily make services foreign-source.
• Receiving funds abroad does not by itself move the income-producing activity.
• A territorial label needs to be read alongside the actual source and exemption rules.