Hong Kong Offshore Company Tax Exemption Guide

A Hong Kong offshore company is referred to as a company that sets up its legal structure in Hong Kong while it conducts its operations and trading outside of Hong Kong’s jurisdiction.

The tax assessment is one of the significant expenses that companies have to pay out of their earned profits annually. Often, the tax assessment turns out to be hundreds and thousands of dollars, which, honestly, is quite unpleasant. If you are looking to do business globally and also want to reduce your tax expense, Hong Kong is the way to go. It offers not only low corporate tax rates but also, Hong Kong offshore companies get a tax exemption on income earned outside of Hong Kong’s jurisdiction.

What does Hong Kong offshore company refer to?

A Hong Kong offshore company is referred to as a company that sets up its legal structure in Hong Kong while it conducts its operations and trading outside of Hong Kong’s jurisdiction.

What is the Hong Kong offshore tax exemption?

As per the Inland Revenue Ordinance (IRO) of Hong Kong, a person has to pay profits tax at the rate of 8.25% on assessable profits up to $2,000,000 and 16.5% on any portion of assessable profits over $2,000,000, if he meets the following criteria:

• The business, trade or profession is carried out in Hong Kong;
• The above business, trade or profession derives profits; and
• The said profits are derived or earned from Hong Kong.

If a person meets the first two criteria but doesn’t comply with the third i.e., he carries out business in Hong Kong but derives profit from outside its jurisdiction; he qualifies for Offshore Profits Tax Exemption. Hong Kong charges taxes on a territorial basis, and hence, any profit sourced outside of Hong Kong is exempt from taxes.

Offshore Tax Exemption Criteria for Types of Businesses:

• Manufacturing Company

You may claim an offshore exemption on 50% of manufacturing profits if you are operating a manufacturing business in Hong Kong by entering into a contract of processing or assembly arrangement with a Mainland China entity. Being a Hong Kong company, you can operate your manufacturing business by providing raw materials, technical know-how, management, training, and supervision to the labor in Mainland China.

• Trading Company

A Hong Kong trading company that carries out its operations and settles contracts with clients and suppliers outside of Hong Kong is exempt from profits tax.

• Services Company

A Hong Kong company that derives its profits by rendering its services outside of Hong Kong qualifies for offshore tax exemption.

How and When to Gain Offshore Status:

The Internal Revenue Department (IRD) issues a tax exemption letter, which maintains effect for a maximum of 3 to 5 years, to local Hong Kong companies that qualify for an offshore status. Without the offshore claim, you will have to pay the full amount of profits tax, regardless of your company qualifying as an offshore company.

If you’re a newly incorporated Hong Kong company, you will receive your first Profits Tax Return (PTR) 18 months after the date of incorporation. Offshore tax exemption claim is filed together with the audit report and PTR. To enhance your chances of tax exemption letter, you shall also submit the following documents to the IRD to prove your claim:

• purchase orders, sales orders and shipping documents
• memos of meetings with customers and suppliers
• organization chart showing the location of offshore operation
• emails, faxes & itemized telephone bills showing to which numbers calls are made to clients/suppliers
• travel receipts & passport copies showing locations and dates of visit

If you are still unsure of how to claim an offshore status, consider contacting us so that we can help you in regulating your operations and business conduct as per the law to qualify your company as an offshore company and ensure IRD issues you the offshore tax exemption letter.