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Hong Kong Offshore Tax Exemption: How To Take Its Advantages?

Content Team4 minute read25 Oct 2021

offshore tax exemption in Hong Kong

1. Hong Kong offshore company: An easily misunderstood term

To begin with, an offshore company is incorporated for business only carried outside of the jurisdiction of its original formation. Some offshore countries are believed tax havens since there is no corporate profit tax in these places. Typical company types like international business companies (IBC) or business companies (BC) exist for the purpose of tax exemption.

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Hong Kong is sometimes considered as the same as Belize, Seychelles, or BVI, which are tax havens. However, a deep sight into current Hong Kong tax laws proves that it should be tagged as a low-tax jurisdiction rather than a tax haven.

Different from normal offshore countries, Hong Kong gives local companies established by foreigners permission to do businesses within the territory of Hong Kong; subsequently, they must pay a tax rate from 8.25 to 16.5 percent for their profit. With its attractive tax rates, Hong Kong seems to be one of the best choices. It’s even better that profits derived outside Hong Kong territory are eligible for tax exemption. An offshore claim is a process of proving your source of profits.

2. Hong Kong Offshore Claim: A key to offshore profit tax exemption

In common offshore jurisdictions, a company formed under specific types i.e IBC or BC is subject to offshore status automatically from the time of its incorporation. Contrastively, it takes a bit more time, effort, and paperwork for a local Hong Kong company to gain offshore status through offshore claim.

Offshore status for a local company is a tax exemption letter released by Hong Kong Inland Revenue Department (IRD) after their prudent inspection period. Obliged by Hong Kong laws, companies are tax-free for the profits derived outside the territory. Without an offshore claim, corporates must pay full profit tax despite their sources of income.

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The process to the approval of IRD for this letter is quite long, not sooner than 6 months. However, it is worthwhile as the offshore status is up to five-year effective. The offshore status will play its role from the time it is issued by IRD, which means the previous annual paid tax is not refundable.

How about partial tax exemption? It is possible for these companies to apply for an offshore claim, of course, it is more complicated, time-consumed, and costly than completely tax-free ones. The explanation is that directors have to spend time working with Certified Public Accountants (CPA) to provide proofs for queries from IRD. Additionally, a partially offshore company whose only a portion of profit comes from outside Hong Kong will typically have to do offshore claims on an annual basis.

3. When should you register for an offshore claim?

Some people might advise you to start the offshore claim progress right after your company is incorporated. Likewise, it is recommended to make an offshore application as soon as filing a profit tax return for the first period (18 months after the incorporation date). The examination goes more smoothly and effectively when corporates can specifically prepare required documents for IRD.

>> Check out our in-depth Guide to Set up a Company in Hong Kong.

4. Who are able to qualify for an offshore claim?

As mentioned above, Hong Kong Inland Revenue Department (IRD) has the power to determine and approve the offshore status for a company under a letter form. Your companies are requested to answer “Question to determine the source of profit” by IRD as exactly detailed as possible to avoid confusion and doubts.

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Actually, there are also chances that the offshore claim requests are rejected by IRD. This unexpected situation occurs mainly because companies are unable to meet the requirements from IRD clearly. Therefore, to raise the success percentage, you should ensure that your companies include, but is not limited to, these criteria:

  • No clients in Hong Kong
  • No physical office and staff in Hong Kong
  • No web hosting in Hong Kong
  • No services, sales, and business performed in Hong Kong
  • No warehousing and fulfillment in Hong Kong

Accordingly, it is intended you take every piece of advice from CPA before making any submission to IRD.

Need an a-to-z guide to doing business in Hong Kong?
This e-book provides you with the latest information about:

  • Incorporation process
  • Annual compliance requirement
  • Hong Kong tax system
  • Hiring issues for Hong Kong Business

5. Is it easy for us to get an offshore claim?

Initially, Profit Tax Return (PTR) should be accomplished as it is a mandatory part of the offshore status examination. The application of an offshore claim would have to be submitted at the same time as PTR filing. The first PTR must be filed when the corporate is 18-month old. The next periods of PTR are every 12 months after. Auditors require the collection of the following from the corporate:

  • Invoices and contracts
  • Bank statements
  • Expense receipts

To help the offshore claim process run fluently, though this list is not all-inclusive, you should prepare the following documents:
Trading proofs such as sales and purchase orders;

  • Shipping documents;
  • Meeting minutes with customers and suppliers
  • Travel documents for any visits to clients and suppliers
  • Phone numbers, email, fax as communication means to support the negotiation process with customers and suppliers.

The process takes several months because IRD will arise questions during their investigation before making their final decision. Additionally, the timeframe depends on different structures of companies and businesses. The more layers indeed, the more convoluted procedure, and the more costly expense certainly.

Firstly, IRD inspects submitted documents from the subject companies with their Corporations and Partnerships Unit. Afterward, their Unit of Field Audit and Investigation might get involved in the progress if there is any signal of tax elimination. A letter of offshore tax exemption will be granted after the company’s documents and clarification persuade IRD.

The offshore status maintains its effect in a maximum of 3 to 5 years, but you should be noticed to do annual auditing to state with IRD that your business still stays offshore. In case there are any changes, they must be mentioned in the auditing reports.

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Thanks to the country’s significant reputation, no matter it is taxed or not, Hong Kong-based corporates are able to gain more opportunities in the global market. Besides the prestige, offshore status performs in enhancing the attraction for Hong Kong as companies can save a large amount of annual expense. That is the reason why more and more business people decide to incorporate in Hong Kong. Now, it is your turn!

Should you have further information or need our assist, BBCIncorp’s experts are always here to help. Free free to drop us an email at service@bbcincorp.com.

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