Offshore Tax Exemption in Hong Kong – All You Need to know
Are you planning to set up a company and business internationally? If you plan to sell to customers around the globe, then Hong Kong is an attractive place for new business entrepreneurs. Hong Kong is ranked as one of the most accessible places to do business in the world. It is an ideal place for conducting banking activities, international trade, investment activities, and asset protection. In fact, the People’s Republic of China, which covers Hong Kong jurisdiction, permits Hong Kong’s autonomy and financial freedom apart from the mainland.
Hong Kong does not have any particular restrictions on company formation, and thus has become a popular jurisdiction to open a company. Under the territorial taxation system, profits earned within Hong Kong are subject to 16.5% corporate taxation (8.25% on profits under USD 250,000).
If you are considering setting up a company in Hong Kong and are interested in knowing more about offshore tax exemption, this article will help you in getting a better understanding and explain how profits tax exemption is possible.
Taxation in Hong Kong
As a matter of fact, Hong Kong taxes are among the lowest in the world. The jurisdiction of Hong Kong has a simple tax structure and favors company setup. Hong Kong’s corporate income tax rate is only 16.5%. There are no capitals gains tax, no VAT/GST, no estate duty, and no withholding tax on dividends or interest. More importantly, Hong Kong companies are not liable to pay tax for their profits earned outside of Hong Kong.
Foreign-sourced income is exempt from tax in Hong Kong, and there are no foreign exchange controls in Hong Kong. Thus, a Hong Kong company that derives income from abroad is free from tax liabilities in Hong Kong. This is one of the most significant advantages of Hong Kong Incorporation.
So, if you are looking for conducting business internationally or in Hong Kong, you should know the procedure for taxation here. As per the jurisdiction of the Inland Revenue Ordinance (IRO) of Hong Kong, a company is subject to profits tax,
- If the profits are derived in Hong Kong (i.e. the profits are sourced in Hong Kong).
- If the company carries on a trade, profession or business in Hong Kong; and
- If the trade, profession or business derives profits.
Hong Kong adopts a territorial source principle of taxation. To be more precise, if a company operates it’s business outside of Hong Kong but receives funds into Hong Kong, then it may not be liable to pay tax in Hong Kong for those profits. Profits tax is not applicable to profits whose source is outside Hong Kong. Therefore, the choice of your location where your company’s activities taking place is a key factor to whether a company’s profits are taxable.
What is Offshore Tax Exemption in Hong Kong?
Once you understand taxation in Hong Kong, the next thing you should know is offshore tax exemption in Hong Kong. When you carry out your business activities entirely outside of Hong Kong, then your business qualifies for Offshore Profits Tax Exemption. Profits tax exemption is granted by the tax authority under the Inland Revenue Department (IRD) of Hong Kong.
To better understand this, here are some examples of activities that would qualify for offshore profits tax exemption:
- The company has no customers or suppliers for their business in Hong Kong.
- The owner or the employees of the business entity operate their business solely outside of Hong Kong.
- The company provides no services in Hong Kong.
- The business entity signs and negotiates with its suppliers and customers outside of Hong Kong.
- The company’s products do not enter Hong Kong.
- The company has no employees based in Hong Kong, and the owner or any overseas employees rarely visit Hong Kong.
Profit Types Exempted from Hong Kong Taxation
Now that you have an idea about taxation in Hong Kong and the concept of offshore tax exemption in Hong Kong, the next thing you need to know about is how this applies to each of the different types of businesses.
- Manufacturing Profits
The Hong Kong manufacturing business enters into a contract processing or assembly arrangement with an entity which is located elsewhere, similar to an arrangement with the entity itself. The Hong Kong manufacturing business would provide the raw materials, management, technical know-how, training and supervision for the locally recruited labor. It might be possible to claim 50% of the manufacturing profits are not taxable in Hong Kong.
- Trading Profits
The Hong Kong companies negotiate and settles the terms of the contracts with customers and suppliers outside of Hong Kong. More importantly, the companies carry out the operations outside Hong Kong. So, these companies can claim that the trading profits so derived are non-taxable in Hong Kong.
- Service Income
The Hong Kong company provides services outside of Hong Kong. If so, then the profits derived from these services rendered would be considered for offshore tax exemption. In fact, several Hong Kong companies appoint service provider or overseas agents in order to perform services on its behalf outside Hong Kong. It may be possible to claim that the entire service income relating to the services rendered outside Hong Kong is not taxable.
How to Claim an Offshore Tax Exemption and Required Documents?
The claim for offshore tax exemption is lodged together with the submission of the Profits Tax Return(PTR) and Audit Report. The Inland Revenue Department of Hong Kong normally issues profit tax returns in April, immediately after the end of the fiscal year of assessment. If you own a newly incorporated company in Hong Kong, then the first profits tax return notice will be issued by IRD 18 months after the date of incorporation.
You need to submit the following documents with the profits tax return to IRD.
- Completed Profits Tax Return
- Auditor’s Report
- Tax computation claiming offshore tax exemption, if applicable.
There may be a chance that the IRD will ask the business entities to provide additional documents and information in order to support offshore tax exemption claim. In fact, the IRD can also select the company transactions and recheck whether the activities involved in these transactions were taken place offshore.
Hence, it is always advisable to maintain all the records to show that all the transactions and activities of the company took place outside of Hong Kong. The documents can include-
- memos of meetings with customers and suppliers
- organization chart showing the location of offshore operation
- travel receipts & passport copies showing locations and dates of visit
- purchase orders, sales orders and shipping documents
- Itemized telephone bills, emails, and faxes showing to which numbers calls are made to clients/suppliers
How can Startupr help you?
Hong Kong companies enjoys many benefits such as limited liability, complete foreign ownership, access to the China Mainland and other Asian countries, low taxation, shareholder privacy, fast registration, and low required share capital. And if you have incorporated your business in Hong Kong and are wondering if you can apply for offshore tax exemption, then it is always better to hire a professional in order to complete all the documentation and provide advice for your company’s activities.
We at Startupr can assist you in reviewing your current operations to ascertain the possibility of making an offshore tax claim. And if your business transactions are outside of Hong Kong, you can apply for offshore tax exemptions from the IRD, and once the accounting is audited, you should submit all the information of tax exemption query letter to the IRD. In fact, we have a high success rate for tax exemption status for our clients, for those conducting their activities outside of Hong Kong.
Check out more information about offshore tax exemptions in Hong Kong in the next coming articles.