Do you even know that the profits sourced outside Hong Kong can be considered offshore profits and are exempted from tax, according to the regulations of the Hong Kong Inland Revenue Department? Let take a look at the qualifications, application materials and process of applying for Hong Kong offshore profits tax exemption and how you can save from tax exemption!
Hong Kong, a world famous free economic zone, together with its good infrastructure and well-developed legal framework, provides outstanding business environment and attracts investors around the globe.
When running your company in Hong Kong, you may do business with partners globally, some of which may be conducted outside Hong Kong. Do you even know that the profits sourced outside Hong Kong can be considered offshore profits and are exempted from tax, according to the regulations of the Hong Kong Inland Revenue Department? Let take a look at the qualifications, application materials and process of applying for Hong Kong offshore profits tax exemption and how you can save from tax exemption!
Am I Qualified for Hong Kong Offshore Profits Tax Exemption?
The Hong Kong tax system follows a territorial principle, meaning that only profits arising in or derived from Hong Kong sources are subject to profits taxation. If you can demonstrate that your earnings are from foreign sources (i.e., offshore sources outside of Hong Kong), your earnings will be tax exempted.
Let’s take a look into some cases and examples that your profits are considered offshore sourced.
You signed a contract with suppliers or customers outside of Hong Kong and conducted business activities outside of the region;
You own a Hong Kong company that supplies manufacturing materials to another entity located outside of Hong Kong;
Your Hong Kong company appointed an overseas agent to perform services on its behalf outside of Hong Kong;
What are the documents for Hong Kong Offshore Profits Tax Exemption Application?
If your company is eligible for Hong Kong offshore tax exemption, you can apply for offshore profits tax exemption when proving the materials below:
1. Basic information about the Hong Kong company:
- Address of the affiliated institutions both inside and outside Hong Kong of the company;
- Introduction to the organizational chart and the operation scale of the company;
- List of employees’ names, positions and titles, and salaries;
- Certificate of Incorporation (CI), Article of Association (AA), Shareholders Agreement;
- Detailed information about the group company (if your company is a subsidiary of a group company);
2. Business and operation record documents of the Hong Kong company:
- Transaction contracts and trade-related documents;
- Documents of payment method and product lists;
- Structure chart showing details of business operations;
- Flowchart of transaction process;
- Documents proving the signing location of contracts or orders;
What is the process of Hong Kong Offshore Profits Tax Exemption Application?
Together with Hongda, we can start the offshore profits tax exemption application process once the materials are well-prepared. In general cases, application for f tax exemption includes the following steps which can take about a half or one year:
- Application submission to the Hong Kong Inland Revenue Department of organized financial statement organization and auditing reports;
- Inquiry letter delivery from the Hong Kong Inland Revenue Department for information checking;
- Reply to the inquiry letter and provide additional materials with the help of a certified accountant;
- The Hong Kong Inland Revenue Department will inform you about the result of your application after checking;
What Are the Advantages and Shortcomings of Applying for Offshore Profits Tax Exemption?
The result of offshore tax exemption will be announced and delivered to your company once the examination of your application is finished. If your company successfully passes the application, you will receive the approval of exempted offshore tax from the Hong Kong Inland Revenue Department. On the other hand, you will need to pay revenue taxes according to normal tax regulations if your application was rejected. Consequently, the advantages and shortcomings of applying for offshore tax exemption in Hong Kong are obvious:
- Save on taxation costs by the exemption of offshore exemption upon successful application;
- The application result is made by the Hong Kong Inland Revenue Department so there is no guarantee of 100% success;
- Time-consuming (the application process can take at least 6 months);
- You still need to pay profit taxes if your application is rejected;
Once the qualification of enjoying offshore tax exemption is approved, you will not need to submit an application annually as long as the operation scope of your company remains unchanged. You will only need to perform annual auditing according to the regulations of the Hong Kong Inland Revenue Department. On the other hand, the Inland Revenue Department of Hong Kong holds the right to decide whether your company is exempted from offshore profit tax, as well as the power to request an inspection of your operation conditions within an indefinite period. If there is any change in your operation scope, you should report to the Inland Revenue Department of Hong Kong immediately.
Based on the actual situation of each case, the application condition varies across different applicants, especially when it comes to determining the sources of profits. Unfortunately, so far there is no universal standard to follow when deciding how to fully compliant with Hong Kong offshore tax exemption.
Updates on Offshore Profits Tax Regulations
Currently, changes in regulations have been put into effect since January 2023. Reviewing and taxing on the offshore profits tax exemption application for the following 4 types of passive income that cannot meet the “substantial economic requirements” are now applied:
- Interests earned in Hong Kong;
- Dividends from investment in Hong Kong;
- Proceeds from equity disposal;
- Incomes from patent intellectual property;
The above-mentioned passive earnings can be exempted from tax as long as the shareholding ratio is less than 5%, the company’s passive income ratio is less than 50%, and the person in charge of the company is a Hong Kong resident or a non-Hong Kong resident owning a permanent establishment.
Already meet the requirement of applying for Hong Kong offshore profits tax exemption? Book a meeting with Hongda’s consultants and see how to get the qualifications to enjoy tax exemption today!