Offshore Corporate Tax Exemption Claim in Hong Kong – We Can Help You to Review for Offshore Tax Claim
Hailed as one of the most important economic powerhouses in the world, Hong Kong is an ideal place for new business entrepreneurs and global investors. The worth mentioning part is Hong Kong does not have any particular restrictions on company incorporation, making it the popular jurisdiction to open a company or start a business in the region. If you are thinking of setting up a Hong Kong company and are interested in knowing more about Offshore Corporate Tax Exemption Claim in Hong Kong, read on, as this article will give you a clearer picture on how profits tax exemption is possible.
Taxation in Hong Kong
Hong Kong applies territorial taxation system and its taxes are among the lowest in the world. Profits generated/earned within Hong Kong are subject to 16.5% corporate taxation, but foreign-sourced incomes are not taxable. In other words, a Hong Kong company that generates income/profit from overseas is not liable to pay tax in Hong Kong. On top of that, there are no capitals gains tax, no VAT/GST, no estate duty, and no withholding tax on dividends or interest in Hong Kong.
As per the jurisdiction of the Inland Revenue Ordinance (IRO) of Hong Kong, a Hong Kong company is subject to profits tax if:
- the incomes/profits are locally sourced (i.e. generated in Hong Kong).
- the company conduct a trade, profession or business in Hong Kong; and
- The trade, profession, or business generates profits.
What is Offshore Tax Exemption in Hong Kong?
The next thing you should know about Hong Kong’s taxation is the offshore tax exemption in Hong Kong. Your business is eligible for Offshore Profits Tax Exemption when your business activities are carried out entirely outside of Hong Kong.
The business/companies below would qualify for offshore profits tax exemption:
- The company with no customers or suppliers for Hong Kong’s business.
- The business owner or the employees operate their business entirely outside of Hong Kong.
- The company offers no services in Hong Kong.
- The business negotiates with its suppliers and customers that are outside of Hong Kong.
- The products of the company do not enter Hong Kong.
- The directors stay less than 60 days in Hong Kong per year
Profits that are exempted from Hong Kong Taxation
- Manufacturing Profits
The Hong Kong manufacturing business enters into a contract/agreement processing or assembly arrangement with an entity that is located outside of Hong Kong. The Hong Kong manufacturing business might have provided the raw materials, management, expertise, training, and supervision for the locally recruited employees. The said manufacturer might be able to claim 50% of the manufacturing profits that are not taxable in Hong Kong.
- Trading Profits
This applies to Hong Kong companies with customers and suppliers outside of Hong Kong where the companies carry out the operations outside Hong Kong, too. Therefore, these companies would claim that the trading profits derived are non-taxable in Hong Kong.
- Service Income
The offshore tax exemption applies if the Hong Kong company provides services outside of Hong Kong. In other words, the incomes sourced from these services rendered would be eligible for offshore tax exemption.
How to Claim an Offshore Tax Exemption and What are the Required Documents?
You need to lodge the claim for offshore tax exemption together with the submission of the Profits Tax Return (PTR) and Audit Report. The Inland Revenue Department of Hong Kong (“IRD”) will issue profit tax returns in April, right after the end of the fiscal year of assessment. If your company is newly incorporated company in Hong Kong, the first profits tax return notice will be issued by IRD 18 months after the date of incorporation of your new company.
The following documents need to be submitted with the profits tax return to IRD.
- Completed Profits Tax Return
- Auditor’s Report
- Tax computation claiming offshore tax exemption, if applicable.
IRD will probably request the business entities to provide additional documents and information to support your offshore tax exemption claim. Please also note that the IRD can select the company transactions and do a recheck whether the activities involved in these transactions were carried out abroad. Therefore, it is advisable to have good file keeping and maintain all the records to prove that all the transactions and activities of the company took place offshore. The documents can include one of the followings:
- memos of meetings (with customers and suppliers)
- organization chart showing the location of overseas operation
- travel receipts & passport copies evidencing 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
If you are wondering if your business is eligible for offshore tax exemption, it is advisable to hire a professional to complete all the documentation as well as to provide advice for your company’s activities. 3E Accounting can assist you to review your current operations to ascertain the possibility of making an offshore tax claim. Contact us today to find out more!