How do I make a successful claim for Offshore status for Hong Kong Company?
If you are planning to set up a company in Hong Kong, or already have a company set up and have commenced business, you may have been interested in the city due to its international appeal as a financial hub and is business friendly tax regime. Hong Kong not only has a simple and straightforward tax system, but also boasts low tax rates of 8.25% on the first HKD 2,000,000 profits (USD 250,000), and 16.5% thereafter. They also allow companies to claim for “offshore status” on their activities outside Hong Kong.
The Hong Kong government does not impose worldwide income on companies, with taxes levied only on the profits earned within the city. This creates an environment for the Hong Kong offshore tax regime to more clearly define what profit making activities are taxable and ultimately paid to the Hong Kong IRD (Inland Revenue Department). This also allows Hong Kong companies who conduct all their activities and management outside the region to claim profits tax exemption on their offshore activities, and thus are dubbed with the “offshore status”.
If you would like more information on how companies can make a successful claim for offshore status, this article will help you understand more about the rules and laws surrounding this tax regime.
What is offshore status?
Technically offshore status is not a legal term, and you won’t find it in any Hong Kong tax book or legal case. It more so describes the state of a company on the offshore claim of its income, and it being exempt from profits tax in Hong Kong.
Normally when a company makes a successful claim for its offshore income, being after thorough review from the IRD and finding no chargeable profits occurring in Hong Kong, the IRD will not normally raise such a review for a few years (typically 3-5 years), or unless the company’s business nature changes significantly. This causes the company to have, in effect, an “offshore status” for its business activities.
However despite this, the company should still conduct it’s regular annual accounts and archive all its documents and other company records, in case of future use.
The curious case of CIR v. Hang Seng Bank Limited 
The cornerstone of the Hong Kong offshore tax regime came from an important legal case in the 1990s between Hang Seng Bank and the CIR (Commissioner of Inland Revenue).
To summarize briefly, the case was surrounding the bank’s foreign exchange department (located in Hong Kong), and the investment of funds in foreign currency certificates of deposits and bonds located in the London and Singapore markets. These certificates were acquired through other agents there, but the instructions for these acquisitions were made by the foreign exchange department in Hong Kong.
The question that arose was, were the profits generated from these investment activities in the location where the instructions for such purchases made, or where the actual funds were held?
The presiding judge, Lord Bridge or Harwich, made the judgement in the bank’s favor, as he ultimately concluded that in fact the profits deriving from these activities generated from the certificates themselves, being located in London and Singapore.
The result of this was a monumental case for the outline of facts for each requirement to consider for the totality of facts for the source of profits and chargeability of tax in Hong Kong.
What are the rules to tax exemption for offshore profits?
From the Hang Seng case and others like it, the IRD has adopted the rules and approach as set out in the IRO (Inland Revenue Ordinance) for this profits tax exemption for offshore claims.
Under the IRO, a person(company) is chargeable to Profits Tax under the following conditions:
- he carries on a trade, profession or business in Hong Kong;
- the trade, profession or business derives profits; and
- the profits arise in or are derived from Hong Kong.
These rules, along with the basic principles for determining the source of profits established over the years, form the backbone for the information considered by the IRD when a company is making an offshore claim for profits tax exemption in Hong Kong. The source of these profits also relies heavily on the business nature of the company, and where their profit producing activities occurred.
How do I make a claim for Offshore status?
If all the company’s operations and profit making activities are outside of Hong Kong, then it can go ahead to make the offshore claim for profits tax exemption.
Don’t be mistaken though. The offshore claim for exemption of profits tax is made when the first Audit Report and PTR (Profits Tax Return) is filed for the company, not beforehand. This is when the company states its total overall foreign income, and how much they are claiming for the exemption of taxes. The completed Audit Report will affect the type and amount of questions the IRD inquires about, if they raise a review of the offshore claim.
The IRD (and most other government agencies) deals in facts, and a company cannot make an offshore claim on hypothetical scenarios in the future before they occur (or before they are completed). Thus the timing for an offshore claim is different from other applications, such as the application for tax exemption under section 88 of the IRO (mainly for charities and non-profit organizations). This filing can be made earlier, either before the first accounts are closed, or even before the company has been incorporated. Find out more about it from our article here, or from the IRD’s guide.
What company documents do I need to keep to help my offshore claim?
For acquiring offshore status through profits tax exemption claims, having the right documents and relevant information is key. Even if the company in fact conducted all its activities outside of Hong Kong, without the right documents their offshore claim may fail.
Therefore, we strongly recommend to archive and record all the company transactions records for making a strong case that all the activities occurred outside of Hong Kong, such as:
- Sales invoices, Purchase invoices and order confirmations
- Bank statements showing receipt/payment of invoices.
- Shipping documents (postage receipts, bill of lading) showing the location and flow of goods.
- Travel expense documents (flight tickets and hotel receipts) and passport book copies showing the location of travel.
- Emails and other correspondence showing communication with third parties.
- Memos of meeting with third parties.
Uncertainty surrounding your offshore claim
While the tax exemption and ultimately offshore status won’t be known for certain until the close of the tax year, and submission of the audit report, this can cause uncertainty for companies when they do their tax planning.
What if their offshore claim is unsuccessful? How much tax would they ultimately have to pay the HK government? And what if the company ends up incurring double taxation in different jurisdictions for the same activities?
These concerns are why it’s best to get a mid-year review of your specific company activities or business operations from a tax professional with experience in handling offshore profits tax exemption claims. Our team at Startupr can provide you more information on this, and give you a better idea to judge your company’s position on these matters.
When do I know if the offshore claim is successful?
Once the IRD has reviewed your offshore claim upon submission of your audit report, they may send you a Tax Query letter outlining further information and documents they require to support your claim.
If you can provide everything outlined in their questions, and they are satisfied with your answers, they will send you a confirmation letter in writing stating no taxation is required for the given year. However before this, the IRD may send several follow up letters clarifying the information you provide, depending on how accurate or vague your answers are.
General FAQs on offshore status
Among the inquiries we get from companies, questions about offshore claims and offshore status remains at the top. This topic seems to be the most important and most complex questions for running a Hong Kong company.
Therefore we have created a list of the most frequently asked questions from companies:
How do I make an offshore claim for Hong Kong profits tax exemption?
The company can make their offshore claim on their profits when they submit the Audit Report and PTR to the government. This claim is made at the end of the financial year when the final profit figures are set.
What happens if my offshore claim is unsuccessful?
If the offshore claim is unsuccessful, the IRD will send a tax demand note (tax bill) to the company to pay the stated amount of tax on the profits. The company will typically have only 4-6 weeks to pay the amount of taxes.
Can I make an appeal to the IRD’s decision? Is there a time limit?
The company has the right to lodge an objection to the tax levied on the company’s profits by the IRD. The time limit to lodge this objection is 1 month from the issue date of the tax demand note.
However for offshore claims, the company should demonstrate new facts/documents that support its claim, rather than re-stating the same information provided in previous responses. You should note that its quite difficult to overturn the IRD’s decision once a judgement is made.
If I need to pay tax, is there interest and penalties on the tax from a few years ago?
In general, the IRD will not impose additional interest or penalties on chargeable tax due from year past for an offshore claim. However separate penalties may occur if the company willfully attempts to defraud or provide inaccurate or misleading information or documents to the government. You may view more information on the penalty provisions under the IRO.
What if 50% of my company’s activities occur in Hong Kong, and 50% outside?
In certain cases where half of the company’s business is located in Hong Kong, and the other half outside the city, then the company can claim an apportionment of 50:50 of its profits taxable. However the activities of the business should be separable, and different parts of the company.
Offshore Profits Tax Advice
After reading all about tax claims for offshore status for Hong Kong companies, if you are still unsure whether your company can successfully claim offshore profits tax exemption, look no further.
Even though this tax advice for offshore profits is traditionally handled by the Big 4 accounting firms, their fees can be many times higher than other service providers. That and finding a reputable firm to handle these offshore cases can be tricky, as most local Hong Kong CPAs only process audits for local firms.
Startupr has years of experience handling offshore tax claims with a high success rate for our companies and their offshore activities. Reach out to Startupr for us to start reviewing your case.
How can Startupr help you?
We at Startupr can assist you in reviewing your company’s business activities to explore the possibility of a successful claim for offshore status; before your incorporate, mid-year, or at the close of the financial year end.
We can also provide you more information on the process and steps for obtaining offshore status. Over the years we have a high success rate for offshore profits tax exemptions for tax query letters for our clients for those conducting their business outside Hong Kong.