Hong Kong offers low corporate income tax rates (8-16.5%) and tax exemptions on profits from activities outside Hong Kong.
The city has no capital gains tax, value-added tax, or consumption tax, and import duties are low.
Only offshore companies proving income exclusively from outside Hong Kong are eligible for tax exemptions.
Consulting a certified public accountant (CPA) is recommended to navigate the complex offshore tax regulations.
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 often perceived as a tax haven, similar to jurisdictions like Belize, Seychelles, or the British Virgin Islands (BVI), which impose no corporate profit taxes.
However, Hong Kong’s tax system positions it as a low-tax jurisdiction rather than a completely tax-free one. The standard corporate tax rates in Hong Kong range from 8.25% to 16.5%, making it an attractive location for businesses due to its relatively low tax burden.
| Assessable Profits | Unincorporated Businesses | Corporations |
|---|---|---|
| First HK$2 million | 7.5% | 8.25% |
| Over HK$2 million | 15% | 16.5% |
For foreign entrepreneurs establishing a company in Hong Kong, profits generated within its territory are subject to these tax rates.
However, the city offers notable advantages, including various tax incentives and the possibility of securing tax exemptions through offshore tax claims (OTC).
The OTC process involves proving that your company’s profits originate from foreign sources rather than Hong Kong, qualifying those earnings for exemption under the territorial tax principle.
Hong Kong's tax exemption applies to profits arising from activities conducted entirely outside its borders. For example:
- Profits from contracts with suppliers or customers located outside Hong Kong, where all related activities occur overseas, are non-taxable.
- If a Hong Kong company supplies materials to manufacturers outside of Hong Kong, the resulting profits may qualify for tax exemption.
- Profits generated by overseas agents performing services on behalf of a Hong Kong company outside of the territory are also exempt.
In essence, while Hong Kong is not entirely tax-free, its low tax rates and territorial tax system provide substantial benefits for businesses with foreign-sourced income.
In response to concerns from the European Union regarding unconditional exemptions for passive income, the Hong Kong government introduced a revised Foreign Source Income Exemption (FSIE) regime, effective January 1, 2023.
The updated rules apply specifically to constituent entities (CEs) of multinational enterprise (MNE) groups, regardless of the group’s size or earnings. Under this regime, CEs must assess whether their profits are offshore sourced and received in Hong Kong.
Offshore profits received in Hong Kong by a CE of an MNE group are considered taxable unless they meet exemption criteria, including:
- Economic substance requirements for non-IP income.
- Nexus approach requirements for IP income.
- Participation exemption conditions for dividends and equity disposal gains.
Latest Update:
In December 2022, the EU updated its FSIE guidance to include disposal gains as passive income, prompting Hong Kong to revise its tax regulations further.
To comply, the Hong Kong government enacted the Inland Revenue (Amendment) (Taxation on Foreign-sourced Disposal Gains) Ordinance 2023. This ordinance expands the scope of foreign-sourced disposal gains and introduces intra-group transfer relief. These changes will take effect from January 1, 2024.
How to Qualify for Offshore Tax Exemption In Hong Kong
To qualify for offshore tax exemption in Hong Kong, your company must file an offshore tax claim (OTC) with the Inland Revenue Department (IRD) to obtain "offshore status."
Unlike jurisdictions where offshore status is automatically granted to specific company types like International Business Companies (IBC) or Business Companies (BC), businesses in Hong Kong must undergo a more detailed verification process.
The Offshore Tax Claim Process
Without an approved OTC, your company will be subject to full profits tax, even on income derived from overseas sources. The OTC process can take at least six months but is worthwhile, as an approved offshore status typically remains valid for 3–5 years.
For businesses earning both onshore and offshore profits, a partial offshore tax claim may be possible. For example, a Hong Kong trading company with overseas agents or branches handling logistics outside Hong Kong would only pay tax on profits attributed to the Hong Kong entity, not those earned by its overseas branches. However, partial claims require annual OTC filings, which can be time-consuming, complex, and costly.
Criteria for Offshore Tax Exemption
To increase your chances of success, ensure your company meets these key criteria:
- No clients based in Hong Kong.
- No physical office or staff located in Hong Kong.
- No website hosted in Hong Kong.
- No services, sales, or business activities conducted in Hong Kong.
- No warehousing or fulfillment operations in Hong Kong.
As part of the process, the IRD will issue a questionnaire to determine the source of your profits. Accurate and detailed responses are critical to avoid confusion or rejection.
Tips for a Successful Claim
Since the IRD may reject claims that fail to meet its requirements, consulting with a Certified Public Accountant before submitting your OTC is highly recommended. Their expertise can help you navigate the process and increase the likelihood of approval.
Obtaining offshore status in Hong Kong requires effort and compliance, but the potential tax savings make it a valuable opportunity for eligible businesses.
Offshore Tax Claim Process and Documentation Requirements
Filing Process and Timeline
To maximize the chances of approval, it’s advisable to file your offshore tax claim (OTC) when submitting your first Profits Tax Return (PTR), which is due 18 months after incorporation. Subsequent PTR filings occur annually, 12 months after the initial filing.
The offshore tax claim process involves a detailed investigation by the Inland Revenue Department (IRD), which may take several months. The timeframe can vary based on your company’s structure and the complexity of its operations.
The process generally follows these steps:
- Document Review: IRD’s Corporations and Partnerships Unit reviews the submitted application and supporting documents.
- Additional Investigation: If necessary, the Field Audit and Investigation Unit may examine further to address any concerns about potential tax avoidance.
- Approval Letter: Once the IRD is satisfied, they issue a letter granting offshore tax exemption status.
The offshore status is valid for 3 to 5 years, but companies must conduct annual audits and confirm that their business operations remain offshore.
Required Documentation
To ensure a smooth review process, maintain detailed records and submit all necessary documents with your PTR. These include:
For Auditors’ Review:
- Invoices and contracts
- Bank statements
- Expense receipts
For Submission to IRD:
- Completed Profits Tax Return
- Auditor’s report
- Tax computation claiming offshore tax exemption (if applicable)
Additional documentation may strengthen your claim, demonstrating that all transactions occurred outside Hong Kong:
- Correspondence with customers and suppliers (e.g., emails, phone records, faxes)
- Travel documents and visa stamps showing locations and timelines
- Purchase and sales orders
- Shipping documents
- Meeting memos
Best Practices
Organizing and maintaining comprehensive records is critical to proving your offshore operations and avoiding unnecessary delays. Thorough documentation of your company’s external activities will streamline the IRD review process and increase the likelihood of a successful offshore tax exemption claim.
