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Hong Kong Offshore Tax Exemption – Everything You Need to Know

Hong Kong is an appealing place for prospective business owners without a doubt. If you want to start a business on a global scale, Hong Kong could be the location for you. When it comes to the best places to do business in the world, Hong Kong is right at the top. It’s an excellent choice for banking, international trade, investment, and asset protection.

One of the reasons Hong Kong’s taxes are among the lowest in the world is because of this. Since its founding in 1995, Hong Kong has rated first in the Index of Economic Freedom. As a result, the city’s economy is officially the most liberalized, making it an ideal area to start and grow a business, with a favorable climate for trade, investment, and the movement of commodities. Hong Kong uses a territorial system of taxation, which means that only income earned in Hong Kong is taxable.

offshore tax exemption Hong Kong

Taxation in Hong Kong 

Only three types of direct taxes are levied in Hong Kong: profits tax (for incorporated bodies), salaries tax (for personal income), and property tax (for income sourced from Hong Kong property). Hong Kong uses a territorial system of taxation, which means that only income earned in Hong Kong is taxable.

For corporate profits, a two-tier tax regime is used, with the first HK$ 2 million profits taxed at 8.25 percent and the remaining profits taxed at 16.5 percent; for personal employment income, a progressive tax regime with basic allowance rules is used, with the first HK$ 132 K incomes tax-free, the next first HK$ 45 K incomes block taxed at 2%, the second block at 7%, the third block at 13%, and the remaining 17% is taxed. The majority of taxes that are popular around the world do not apply in Hong Kong. There is no sales or VAT tax, withholding tax, capital gains tax, dividends tax, or inheritance tax.

How much tax does a Hong Kong company pay?

Branches and corporations are taxed in the same way. The following profit tax rates apply: 8.25 percent for corporations (7.5 percent for unincorporated firms) on the first HKD 2 million in assessable earnings, and 16.5 percent for corporations (15 percent for unincorporated businesses) on the rest of assessable profits.

Corporations in Hong Kong have two profit tax rates to choose from:

  • Corporate Taxation in a Single Tier – Corporations are taxed at 16.5 percent on assessable profits under the Single-Tier Corporate Tax System, whereas unincorporated firms are taxed at 15%.
  • Profits Taxation in Two Tiers – The Two-Tier Profits Tax Regime lowers the tax rate for the first $2 million of assessable profits for both corporations and unincorporated businesses. The two-tier profits tax rates are in force for the 2018/19 fiscal year (i.e., for a taxpayer’s financial year ending between 1 April 2018 and 31 March 2019), and they are designed to dramatically lower the tax burden of most small and medium-sized businesses (SMEs).
  • For corporations, the first HK$2 million in profits will be taxed at half the present rate (i.e., 8.25 percent), with the remaining income subject to the current 16.5 percent tax rate.
  • For unincorporated firms, the first HK$2 million in profits will be taxed at half the present rate (i.e., 7.5%), with the remaining income being taxed at the current 15% rate.

Is foreign sourced income taxable in Hong Kong?

Corporations based in Hong Kong are not taxed on their worldwide earnings. Foreign-sourced income is not taxed, whether or whether it is transferred to Hong Kong SAR. As a result, there is no explicit tax provision dealing with overseas earnings deferral or non-remittance. There is no controlled foreign company (CFC) regulation in Hong Kong SAR.

Inventory is assessed at market value unless it is sold to a person carrying on business in Hong Kong SAR, who can deduct a corresponding amount as the cost of the inventory in computing the assessable profits. There are additional particular tax requirements for valuation when the intention to hold something as trading stock changes to holding it as a capital asset or vice versa, or (ii) trading stock of a trade is purchased or disposed of outside of the trade. In such cases, market value will be used to value the property.

Hong Kong Offshore Company

Hong Kong is regarded as one of the most business-friendly cities in the world. Setting up a company in Hong Kong is simple and straightforward, with no additional bureaucracy or red tape. Furthermore, Hong Kong has a pro-foreign ownership policy that allows a company’s shares to be owned entirely by foreigners. Prior to the formation of a Hong Kong corporation, no special permissions from government agencies are required. Despite the fact that Hong Kong does not have a special statute governing the formation of offshore companies, it is one of the most preferred countries for doing so due to the following significant benefits:

  • low-tax environment
  • foreign exchange controls are not in place
  • Stability in politics and the economy
  • Setting up an offshore business is simple.
  • Setting up an offshore business in Hong Kong is ideal for the following purposes –
    • actions involving offshore banking
    • international commerce
    • activity involving investment
  • asset safeguarding

What is an offshore company in Hong Kong?

Offshore companies conduct business outside of the national borders of the nations in which their stakeholders reside. Offshore companies in Hong Kong do not have to pay corporate tax if 100% of their revenue comes from outside the city. An offshore company can be used for any reason that a domestic company can, including creating and maintaining bank accounts, engaging into legal agreements, storing digital or physical assets, conducting transactions, and starting and operating a business. 

Hong Kong Offshore Tax Exemption

In most offshore countries, a company incorporated under a specified type, such as an IBC or a BC, is automatically granted offshore status from the moment it is formed. In contrast, obtaining offshore status through an offshore claim involves a little more time, effort, and documentation for a local Hong Kong firm.

After a thorough inspection process, the Hong Kong Inland Revenue Department (IRD) issues a tax exemption letter (tax query letter) to a local company. Companies are exempt from paying taxes on earnings earned outside of Hong Kong if granted this exemption, otherwise they must pay full profit tax regardless of their sources of income if they do not have an offshore claim.

What is Hong Kong offshore tax exemption?

Offshore corporations are tax-free, while companies formed in Hong Kong are tax-free on all foreign-sourced income. Companies must be examined by the Hong Kong Inland Revenue Department (IRD) to be eligible for Hong Kong offshore tax exemption.

The IRD approval process for this letter is lengthy, taking at least 6 months. It is, however, worthwhile because the offshore status is valid for up to five years. The offshore status will take effect as soon as it is approved by IRD, which means that the prior year’s tax will not be refunded.

Who can qualify for offshore tax exemption?

Under a letter form, the Hong Kong Inland Revenue Department (IRD) has the authority to determine and approve a company’s offshore status. To minimize uncertainty and doubts, your enterprises are asked to respond to IRD’s “Question to ascertain the source of profit” in as much detail as possible. Obtaining offshore status through an offshore claim involves time, effort, and documentation for a local Hong Kong firm.

Required documents and process for offshore claim in Hong Kong

The Profit Tax Return (PTR) should be completed first because it is a requirement of the offshore status examination. An offshore claim application would have to be submitted at the same time as the PTR filing. When the corporation is 18 months old, the first PTR must be filed. PTR will be sent every 12 months after that. Auditors expect the following information from the company:

  • Contracts and invoices
  • Statements of account
  • Receipts for expenses

The following documentation should be prepared to help the offshore claim procedure work well, while this list is not exhaustive. Proofs such as sales and purchase orders are traded.

  • Shipping documents
  • Minutes from meetings with clients and suppliers
  • Travel paperwork for any client or supplier trips
  • Phone numbers,
  • Email addresses,
  • Fax numbers are used to communicate with customers and suppliers during the negotiation process.

Important things to Consider for Offshore Tax Exemption 

To begin, it is critical to distinguish between a corporation with offshore activity and an offshore company. An offshore company can simply be a company that has been incorporated in another country, often in a tax haven such as the British Virgin Islands (BVI), whereas a company with offshore activities can be incorporated in a country such as Hong Kong, but its business activities are carried out elsewhere. 

Only a Hong Kong incorporated company with offshore activities is eligible for tax relief under this arrangement. Meanwhile, Hong Kong residents must apply for offshore status; it is not granted automatically. If your business does not have a physical office, purchases, customers, investments, or bank accounts in Hong Kong, you may be eligible for a tax exemption. It should be noted, however, that using a virtual office to receive mail is permitted.

When filing the company’s earnings tax return, you must apply for a profit tax exemption. Newly established businesses will receive their first earnings tax return 18 months after their incorporation date, with an additional three months to file.

One must include an audit report with your profits tax return when filing it. If you advise your auditor ahead of time that you want to file for profits tax exemption, they will prepare your accounts, tax computation, and profits tax return in such a way that your profits are not taxable in Hong Kong.

When you file your profits tax return and audit report to the IRD, they will see that you have designated your company as “offshore”. As a result, they’ll treat this as an application for tax relief, and they’ll start looking into your claim of offshore status. The IRD will send you their first round of inquiries anywhere from a few months to a year later. You’ll need to react with documentary evidence to back up your claim, such as copies of email conversations and contracts with clients and suppliers, company directors’ travel logs, and so on.

Need any Assistance in Accounting or Taxation in Hong Kong?

The standards for obtaining offshore status are quite stringent, making the process of filing for tax exemption extremely difficult. While applying for a tax exemption is not easy, it is, at the end of the day, an investment. Having said that, doing it right takes time and expertise, making it a costly process. As a result, filing for tax exemption may only be worthwhile if you are dealing with a large sum of money. If you want to save yourself from paying higher taxes you can get assistance from us.

We at Startupr provide you with essential information and accounting assistance to handle your Hong Kong offshore company’s claim. We help in registering the offshore claim of your Hong Kong company with the Inland Revenue Department. Contact us today!