Understanding taxes can be complex, especially for businesses in Hong Kong. One important factor to consider is the offshore tax exemption, which may allow a Hong Kong-incorporated offshore company to avoid paying profits tax.
Tax Exemption: Is Hong Kong Tax-free?
Hong Kong is not “tax-free.”
It operates a low-tax, territorial system: only Hong Kong-sourced profits are taxed.
Foreign-sourced income may be non-taxable, but you need to show where the profit-generating activities actually took place.
The Inland Revenue Department (IRD) looks at the source of profits in substance, not labels like “offshore company.”
Profits Tax Rates (Two-Tier)
- Corporations: 8.25% on the first HKD 2,000,000 of assessable profits; 16.5% above that.
- Unincorporated businesses: 7.5% on the first HKD 2,000,000 of assessable profits; 15% above that.
Only one connected entity in a group can benefit from the lower band in a year.
How Hong Kong Determines the Source of Profits
Hong Kong looks at what you do to earn the profits and where you do it.
- Trading profits: focus is on where contracts are negotiated and concluded and where the key steps in the trading cycle take place.
- Service profits: focus is on where the services are actually performed.
Factors like where your customers are, where your bank account is, the invoicing currency, or where your website is hosted do not, on their own, decide the source of profits. See DIPN 21 for detailed guidance.
Offshore Profits Claims (Active Income)
There is no formal, long-term “offshore status” in Hong Kong.
Each offshore profits claim is made through your tax filings and supported by evidence.
The IRD can raise enquiries and decide the position for the specific years under review, and may reach a different view in later years if the underlying facts change.
Your first Profits Tax Return is usually issued about 18 months after incorporation or commencement of business.
File it with audited accounts and clear tax computations, including your offshore claim and supporting explanations.
FSIE: When Passive Foreign-sourced Income Becomes Taxable
Hong Kong’s Foreign-Sourced Income Exemption (FSIE) regime applies to constituent entities of multinational enterprise (MNE) groups.
Certain types of passive foreign-sourced income received in Hong Kong are taxable unless the entity can meet the relevant exemption or relief conditions.
Covered Income and Effective Dates
From 1 January 2023
- Interest
- Dividends
- IP income (such as royalties)
- Equity disposal gains
From 1 January 2024
- Disposal gains on non-equity assets, including movable and immovable property
Main Reliefs and Exemptions
Depending on the type of income, an MNE entity may rely on:
- Economic substance relief for non-IP income
- Nexus requirement for IP income
- Participation exemption for dividends and disposal gains
- Intra-group transfer relief, subject to specific conditions
Following the 2024 refinements to the FSIE regime, the EU removed Hong Kong from its tax watchlist in February 2024, signalling that the updated rules now meet the EU’s substance and anti-avoidance expectations.
What Evidence the IRD Looks For (Active Income)
Have contemporaneous records that show what was done, where, and by whom, for example:
- Contracts, plus notes or emails showing where key terms were negotiated and where they were signed.
- Email chains, call logs, meeting notes, and travel records evidencing offshore negotiations or service delivery.
- Purchase and sales orders, Incoterms/shipping terms, title-transfer points, and shipping documents (bills of lading, airway bills).
- Details of staff and agents: where they are based, what they do, and how they are involved in each deal.
- Invoices, bank statements, and a clear audit trail tying income to the underlying transactions.
Together, these help support your source of profits analysis under DIPN 21.
Common Reasons Offshore Claims Fail
- Work actually done in Hong Kong. Core services are performed in Hong Kong for overseas clients, so the place of performance points to Hong Kong profits.
- Deals negotiated or concluded in Hong Kong. Key trading contracts are effected in Hong Kong, even if the goods or funds move across borders.
- Poor paper trail. Emails, contracts, board minutes, and instructions do not clearly show where decisions and key steps took place, making the offshore story impossible to support.
Taxes and Indirects
| Item | Position |
|---|---|
| Profits tax (two-tier) | Corporations: 8.25% on the first HKD 2,000,000 of assessable profits, then 16.5%. Unincorporated businesses: 7.5% on the first HKD 2,000,000 of assessable profits; then 15% above that. |
| VAT / sales tax | None in Hong Kong. |
| Capital gains tax | No standalone capital gains tax. Trading gains may still be taxable under source rules. |
| Customs tariffs | Hong Kong is a free port with no general customs duties. Excise duty applies to liquor, tobacco, hydrocarbon oil, and methyl alcohol (administered by the Customs and Excise Department). |
| FSIE scope | Applies to in-scope MNE constituent entities receiving specified foreign-sourced passive income. Exemption is possible where economic substance, nexus or participation conditions are met. From 1 Jan 2024, certain disposal gains on non-equity assets are also covered. |
Securing a Hong Kong Offshore Tax Exemption
Proving that profits are sourced outside Hong Kong depends on facts and records, not a formal status. Air Corporate can review your transactions against DIPN 21 and the FSIE rules to identify which profits may qualify for non-taxable treatment.
We can prepare a document checklist, align your audit trail, and draft the position paper you will use in your Profits Tax Return (PTR) filing with the IRD. If you proceed, we can also handle the PTR preparation and responses to IRD enquiries so the claim is accurate and well supported.
Need a compliant, evidence-led approach? Contact Air Corporate to review your facts, strengthen your filing, and reduce the risk of challenge.
FAQs
It’s not a certificate or special status. Under Hong Kong’s territorial system, profits arising in or derived from outside Hong Kong may be non-taxable if you provide evidence of where the profit-generating activities occurred in your Profits Tax filing. The Inland Revenue Department (IRD) reviews facts and may raise enquiries (see DIPN 21).
Any taxpayer can have foreign-sourced profits treated as non-taxable if the source tests are satisfied. There is no rule that you must have no Hong Kong customers, staff, or bank accounts; what matters is where you carry out the core profit-making operations (e.g., where contracts are effected for trading, where services are performed for service income).
- R&D super deduction: 300% on the first HK$2 million of qualifying local R&D spend; 200% thereafter (Type A/B rules apply).
- Charitable donations: Cash donations of HK$100+ to s.88 charities are deductible, subject to a 35% cap (individuals; corporate rules apply under Profits Tax).
- Capital items: Generally not deductible as expenses; instead, depreciation allowances or specific regimes may apply (e.g., plant/machinery, industrial/commercial buildings). See IRD guidance.
- Property Tax: Rental income is chargeable with specific deductions/allowances; this is not a general “incentive.”
