It all depends on what you define as demon or sorceror. Kahn and Tsung are both obviously stronger and share very little to nothing in comon with Oni, which means demon, like Moloch and Drahmin. This would sugjest that they are not of the same race. A demon, by definition, would be a creature that is closest to be calling "native" to the Neatherealm. So, in all truth and reallity not even Shinok is a true demon.
Most people like to use the term demon loosly both in MK and the rest of the world as a general name to all evil beings. In Christian Mythology a demon is by definition the fallen angels that chose to serve Lucifer.
If you take the time to read the section on mk history on the TRMK site you will read that Shinok killed Lucifer. He inherited Lucifer's thrown and, with it, the fallen Angles.
So, whether you look at it in a Christian veiw, an MK veiw, or a general veiw; the only two demon we know are Moloch and Drahmin.
So, if Kahn and Tsung are not demon, then what are they? Tsung is a sorceror. He is native born to Earth, as the history sections will tell you. A sorceror is a being that practice the craft of shifting the powers of reallity. Or, in short, a person who does magic.
Now, considering the Christian world sees the practice of magic as Satanic, the dubbing of Shang Tsung as a demon would seem logical. But if we look at him by definition, he is a sorceror, native born to Earth, that colects souls and practices that dark arts. He is not a demon. He is a mortal who has found imortality by means of sorcery.
Shoa Kahn is not demon. Tarkatan are hybrids of demon and mortal. Now, in referance to the post of how feirce Shoa Kahn looked in MK2 pictures, you are corect. I beleive they originaly intended Kahn to be Tarkatan, much like Baraka. But over the years, and thanks to the movie, he is seen a more mortal if anything. But, we must also look at edenia. Edenians live for next to forever and look remarkably human.
Kahn was the Emperor of Outworld before he invaded Edenia. He rose to power by assasinating Onoga with poisen, as Deception points out. Kahn is then asumed to be native to outworld, and not Edenia.
The simple answer. Although Shoa Kahn is not demon, his race in un-clear. He is either Edenian, or Outworld; more likely Outworld. He has too acheived imortality by the same arts that he has taught Tsung. The movie teaches that. He is "imortal."
So, from the MK2 pic he is prooved Tarkatan. From MKA, he is prooven likely Edenian. Two conclicting sorces that leave us, as the fans, to interpert to our liking. Actualy, MKA even hinted of him being, in a sense, a demi god. Kahn is up for grabs on for issue of race. One thing's for sure, he'll never be truly dead. lol