Offshore Tax Exemption in Hong Kong

For those who are reading this article, you are probably interested to know whether offshore profit is taxable in Hong Kong. Hong Kong adopts a territorial source principle of taxation. In simple terms, if your profit is generated outside Hong Kong, it is not taxable by the HK local authority.

It is straight-forward to understand the concept of territorial source principle. However, it can sometimes be confusing when we apply the concept in different company scenario. To give company owners a better idea of how the offshore taxation concept works in Hong Kong, we have prepared this article to illustrate the Hong Kong taxation system and the benefits of having a Hong Kong offshore company.

Profit Tax Rate for Offshore business – 0%

When it comes to taxation, many foreigners choose to make use of a Hong Kong offshore company. Hong Kong adopts a territorial source principle of taxation. In other words, an offshore company does not have to pay tax in Hong Kong. The corporate tax rate can be as low as 0%. To be precise, the Hong Kong Tax Department focuses on profits sourced from Hong Kong. Hence, if your customers are all based outside Hong Kong, you can consider registering a Hong Kong offshore company.

Profit Tax Rate for Onshore business – 8.25%

Before we discuss how the source of profits can be classified as outside Hong Kong (offshore), we might want to understand what is considered as profits sourced from Hong Kong (onshore). Many company owners want to minimize tax liability as long as taxation rules allow. They rather pay tax in a low tax regime, but not a country which charges unreasonably high tax.

Hong Kong adopts a two-tiered profits tax rates starting from 2018. If you want to pay tax in Hong Kong, the profit tax rate is 8.25% for the first $2 million (HKD) of assessable profits. Rest of the profits are taxed at 16.5%.

How do I know whether my company can obtain offshore status?

Over the years, the Tax department considers different factors whether profits are classified to be sourced in or outside Hong Kong. Foreigners, who are interested in registering an offshore company in Hong Kong, should pay attention to the next section.

What are the general principles and considerations?

Matter of Fact

The Hong Kong tax department grants offshore claim decision based on a matter of fact. In simple terms, if your customers are based in Hong Kong, it is a practical matter of fact you generate profit from Hong Kong. The principle is based on the nature of each business transaction, and for each transaction which generates profits for the company.

For example, if you run a trading business, the tax department focuses on where contracts for purchase and sales took place. The tax department does not only consider the place you sign the contract. They also look into the process, i.e. how you negotiate the contract, and how you complete and perform the terms and conditions of the contract. It is not just about where you buy and sell your products. It is also about where you store the products, how you ship the products, and where and how you process the orders. All relevant facts will be considered.

Where does the operation take place?

When it comes to operation, it is again a matter of fact. For example, if you have a physical shop in Hong Kong, it is prima facie that there is business operation in the city. Hence, profits are likely to be classified as “sourced from Hong Kong”.

Similarly, if you have a sales team based in Hong Kong, or if you have workers manufacturing your products in Hong Kong, the tax department is likely to treat you as an onshore business. Hence, company owners, who want to obtain “offshore status”, shall only operate their companies outside Hong Kong.

To further clarify, the tax department focuses on ‘operation’ which leads to the profit-making transactions. Hong Kong Tax department is less likely to care about activities which are incidental to those transactions. For example, receiving payment from a Hong Kong bank account does not affect your offshore status.

Where is the Principal place of business?

The tax department also considers factors such as the principal place of business and where the company makes its daily decision. However, having a physical presence in an overseas market does not necessarily mean the company is an offshore business. One can still generate profits from Hong Kong remotely. Hence, this is only one of the factors to be considered when the tax department grants offshore status.

For example, if you run a manufacturing business, the tax department will focus on the place where your products are manufactured. If you manufacture your products in Hong Kong, your profit is 100% taxable. If you manufacture products outside Hong Kong, then you can go for offshore status. However, in reality, things are rarely this simple.

The operation may be performed partly in Hong Kong and partly executed in other countries. Good news is that the Hong Kong government is sensible enough to give partial offshore status. If 50% of your product is manufactured outside Hong Kong, this specific part of profits will not be taxable by the Hong Kong local authority.

Here is another typical example. Some Hong Kong companies enter into a manufacturing agreement with companies based in Mainland China. In the agreement, it states that the Mainland China company only has to provide factory premises and workers. On the other hand, the Hong Kong company shall provide raw materials, machinery, equipment, technical training and instructions without consideration. During the whole manufacturing process, the Hong Kong company will always remain as the legal owner of those raw materials and the finished products. After the Mainland company complete the manufacturing process, the Hong Kong company shall pay the Mainland company a service fee. In theory, profits shall be classified as offshore if manufacturing is not performed in Hong Kong. However, the tax department is in the view that this type of specific arrangement or operation performed in Mainland China complement its profit-making activity in Hong Kong. Hence, the tax department may just grant a partial offshore status.

Do’s and Don’ts for offshore company owners

To avoid unnecessary hassle with the tax department, company owners, who intend to claim offshore status, shall pay attention to the followings:

1. Sales and purchase contracts shall be performed outside Hong Kong
2. Sales should not be made to Hong Kong customers or Hong Kong companies
3. A purchase shall not be made or performed in Hong Kong.
4. Staff, who are responsible for profit-making transactions, shall be based outside Hong Kong.

The process to obtain offshore company status?

Low or No tax attracts many foreigners to open their companies in Hong Kong. While an offshore company does not have to pay tax in Hong Kong, the Hong Kong tax department requires an offshore company to submit an audited report for every financial year. To prepare the offshore report, our auditors will require the followings by the end of the year. Processing time is usually between 1 – 3 months.

• Corporate Statement of the offshore company
• Invoices of the offshore company
• Expense receipts of the offshore company

How do I register an offshore company in Hong Kong?

To enjoy the tax exemptions, you can register your Hong Kong offshore company today. The process is so simple that it can be as fast as 1 business day. Unlike other jurisdictions, Hong Kong does not require a local director. In other words, foreigners can have 100% control of their offshore company. So what are the requirements?

1. Minimum 1 director
2. Minimum 1 shareholder
3. Minimum Capital Requirement – 1 issued share
4. Minimum 1 company secretary (must be a Hong Kong resident or a Hong Kong body corporate TCSP licensee)
5. Virtual address in Hong Kong – (must be a Hong Kong commercial address)

For item d & e, foreigners can seek for official TCSP licensee Get Started HK for assistance. To start your offshore application, GetStarted.HK needs the following.

1. Proposed company name
2. Scan copy passport
3. Scan copy address proof

You can check out more information from our website. Alternatively, you can fill out the application form at this link and our offshore company expert will get back to you within 12 business hours.

Disclaimer: This article is intended for reference only. This article is not a piece of taxation advice. The Inland Revenue Department has sole and full discretion in all taxation matters in Hong Kong, including but not limited to granting offshore status. For in-depth information, offshore company owners can purchase a hard copy of Chapter 112 Inland Revenue Ordinance from the Online Government Bookstore. Alternatively, you can contact us for consultation. Thank you for your kind attention.