How to Take Advantage of Tax Exemptions in Hong Kong

Hong Kong is globally recognized as an international business hub, attracting investors with its low corporate income tax rate and tax exemptions.

Thousands of trading companies, professional services firms, and multinationals are registered annually in Hong Kong.

The city has the right facilities and resources for individuals and corporations seeking an overseas destination for their businesses. 

While there are numerous reasons why companies register in Hong Kong, the city has attracted many foreign investors seeking to hold their assets offshore because of its low tax rate and tax exemptions. 

If you're wondering how a Hong Kong company can take advantage of the tax exemptions, keep reading to find out.

Is Hong Kong Tax-free?

Hong Kong is widely recognized as a tax haven by investors.

The city does not impose capital gains tax on the value of disposed assets or charge value-added tax or consumption tax on goods.

Import duties are also low and levied on a few goods.

However, Hong Kong is not tax-free as individuals and companies are required to pay income tax on their taxable income.

The good news is the corporate income tax rate in Hong Kong is between 8-16.5% which is lower than the tax rates in most tax jurisdictions. 

But unlike many jurisdictions, taxable income in Hong Kong is restricted to profit derived from trading activities or businesses conducted in Hong Kong.

This has presented growing and large organizations with a juicy benefit – offshore tax exemption. 

Offshore Tax Exemption In Hong Kong and How to Take Advantage of It

An offshore company is a company set up in a country other than where its shareholders are domiciled or where its parent company is registered.

Offshore companies may conduct business in that country or not.

Many offshore companies are asset-holding companies that do not derive any profit or engage in any business in those offshore countries. 

In Hong Kong, offshore companies that do not conduct business in Hong Kong or derive income concerned from Hong Kong are eligible for tax exemptions.

Many foreign companies benefit and maximize profit from the offshore status conferred on foreign companies in the city.

If you're thinking of registering an offshore company in Hong Kong or wondering how your offshore company can take advantage of the offshore exemption status in Hong Kong.

Here are two simple steps to follow:

Step 1: Register Your Offshore Company

Registering your company is the first step you must take to become eligible for offshore tax exemptions.

Luckily, you can register your company digitally with us in less than 48 hours and you do not have to visit Hong Kong to do so. 

You can register your company with a new name or use your company's name as long as it is available and complies with local naming regulations.

Your company's directors and shareholders can be foreign individuals or foreign entities.

But, you'll need to appoint a qualified and licensed company secretary which must be either a Hong Kong resident or a firm with a Trust and Company Service Provider (TCSP) license.

Your secretary would be the one responsible for the company secretarial duties as mandated by law.

Alternatively, you can appoint a digital company secretary and let them take care of it for you.

Step 2: File an Offshore Claim: IRD

An offshore company seeking to claim tax exemption must apply for offshore claim with the Hong Kong Inland Revenue Department (IRD).

Understanding Offshore Claims

The IRD issues tax exemption letters to eligible companies. 

Hong Kong's territorial tax system, as defined by the Inland Revenue Ordinance (IRO), which means companies are only taxed on profits generated in or derived from Hong Kong.

Only companies operating business activities outside Hong Kong that result in overseas income can file an offshore claim with the IRD for tax exemptions.

The IRD, the Hong Kong tax authority, assesses these claims based on the IRO.

When to Apply for Claiming Offshore Tax Exemptions In Hong Kong

There's no strict deadline to apply for claiming offshore tax exemptions in Hong Kong, and a company that has been registered for years can still apply.

It is however advisable to submit your application within the first 18 months of the company's incorporation. 

Newly incorporated companies in Hong Kong are required to file profit tax returns within 18 months of being registered. You'll need to submit your profit tax returns with your application.

Therefore,  if you want to claim tax exemptions on profit achieved within your company's first years of incorporation, you'll have to report it.

How to Do Offshore Tax Claim In Hong Kong

Claiming tax exemptions on your company's profits arising in Hong Kong involves filing your annual Profits Tax Return (PTR) with the Inland Revenue Department (IRD) and supporting documents.

The good news is that there's no separate application for an offshore claim.

A Hong Kong business can claim this exemption when filing its regular Hong Kong PTR, which typically includes a dedicated section for claiming offshore profits. This income would not be considered income subject to Hong Kong tax.

Be prepared to submit strong evidence to substantiate your claim. The IRD may request various documents, including:

• Contracts and Invoices: These documents should demonstrate the nature of your offshore business activities, the location where the services were rendered or goods delivered, and the parties involved.
• Banking Records: Provide bank statements or other financial records showing receipts and payments related to your offshore transactions to help verify the income source and location.
• Business Activity Evidence: Strengthen your claim by providing additional documentation, such as emails, travel documents, or meeting minutes, that demonstrate your overseas business activities.

In addition to the documents above, the IRD may request your company's incorporation documents during their review process.

After submitting your PTR with the offshore claim, the IRD might contact you for further information or clarification. Respond promptly and comprehensively to any inquiries they may have.

The IRD will thoroughly review your claim and supporting documents to determine its validity. This process can take several months.

Considering the complexity of offshore tax regulations, it is highly recommended that you consult a certified public accountant (CPA) in Hong Kong.

A qualified CPA can ensure you meet all the requirements for claiming offshore income, advise you on your options, and guide you through the filing process smoothly, minimizing stress.

Our team of experienced accountants can assist you with your offshore claim application in Hong Kong.

We can offer expert advice on your situation and help ensure a smooth and efficient process for claiming your tax exemptions.

Are all Offshore Companies Eligible for Tax Exemptions In Hong Kong?

Not all offshore companies are granted offshore claims by the IRD as it can approve or reject applications for offshore status.

This is because not all offshore companies are eligible for tax exemptions in Hong Kong. 

Only offshore companies capable of proving that their income was derived exclusively from locations outside Hong Kong are eligible for offshore tax exemptions in Hong Kong.

The IRD requires offshore companies seeking offshore tax exemptions to prove that they do not conduct business in the region or derive any income from the region.

Companies are required to answer questions and provide supporting documents to prove this. 

Can Onshore Companies Claim Tax Exemptions In Hong Kong?

Any company set up in Hong Kong can claim tax exemptions on any part of its only income that was not derived from Hong Kong.

Therefore, an onshore company can claim tax exemption if part of its income was derived outside Hong Kong. 

However, it is important to note that this is a partial exemption as the onshore company will still be required to remit income tax profit derived from Hong Kong.

Many companies have benefitted from Hong Kong's low-income tax rate and tax exemptions.

Setting up affiliate and subsidiary companies in Hong Kong to hold your company's assets can help you maximize profit. 

If you're ready to take advantage of tax exemptions in Hong Kong, we're ready to help you achieve your investment goals in Hong Kong.