Hong Kong Offshore Claim: The Quick Guide
Hong Kong is known for its business-friendly environment and low tax rates, making it a popular destination for companies looking to expand their operations. One of the key factors that make Hong Kong an attractive location for businesses is its territorial source principle of taxation. This means that profits sourced from outside Hong Kong are not subject to Hong Kong Profits Tax, resulting in a 0% tax rate on all offshore profits. In this article, we will delve deeper into the concept of offshore claim in Hong Kong and everything you need to know about it.
What is the headline corporate tax in Hong Kong?
As mentioned earlier, Hong Kong adopts a territorial source principle of taxation, which means that only profits arising in or derived from Hong Kong are subject to Hong Kong Profits Tax. Currently, the tax rate for Hong Kong companies is 8.25% on the first HKD 2 million of net profit, approximately USD 255,000 and 16.5% on the rest of net profit.
What is Hong Kong offshore tax exemption?
Under the territorial basis, the profits tax is only charged on profits arising in or derived from Hong Kong. In simple terms, this means that a person who carries on a business in Hong Kong but derives profits from another place is not required to pay tax (i.e. 0% profits tax) in Hong Kong on those profits. However, this exemption is not automatically applied to a company's profits sourced outside Hong Kong. Instead, the company has to apply for it in its yearly profit tax return. This application is known as an offshore claim.
Who is eligible to apply for an offshore claim?
Any company that is incorporated in Hong Kong and has profits sourced from outside Hong Kong can apply for an offshore claim. This includes both local and foreign companies operating in Hong Kong.
Companies must meet the below eligibility criteria:
No Customers in Hong Kong, No Vendors in Hong Kong, No Physical Offices and Employees in Hong Kong, No Contracts Negotiated or Concluded in Hong Kong, No Properties in Hong Kong, No Management Personnel Working in Hong Kong, No Web Hosting in Hong Kong, No Business Performed in Hong Kong, No Warehousing, Fulfilment or Shipping in Hong Kong
Companies must meet the below eligibility criteria:
No Customers in Hong Kong, No Vendors in Hong Kong, No Physical Offices and Employees in Hong Kong, No Contracts Negotiated or Concluded in Hong Kong, No Properties in Hong Kong, No Management Personnel Working in Hong Kong, No Web Hosting in Hong Kong, No Business Performed in Hong Kong, No Warehousing, Fulfilment or Shipping in Hong Kong
Any restriction on company activities that can apply for an offshore claim?
Any business that has profits sourced from outside Hong Kong can apply for an offshore claim. This includes trading, manufacturing, and service companies. However, it is important to note that the offshore claim does not apply to certain types of income, such as rental income from properties located in Hong Kong or income derived from the sale of Hong Kong properties.
Example of companies that usually enjoy the offshore tax exemption:
E-Commerce, selling on Amazon, Shopify, Digital Marketing Services, Online Software Sales, Mobile App Sales, Consulting Services, Rental from overseas Real Property, Security Trading/Investment, International Trading
Example of companies that usually enjoy the offshore tax exemption:
E-Commerce, selling on Amazon, Shopify, Digital Marketing Services, Online Software Sales, Mobile App Sales, Consulting Services, Rental from overseas Real Property, Security Trading/Investment, International Trading
What is the next after the offshore tax exemption is filed?
Once the offshore claim is approved by the Inland Revenue Department (IRD), the company will be exempted from paying tax on its offshore profits. The company will only be required to pay tax on profits arising in or derived from Hong Kong.
Can the offshore claim be challenged?
The IRD may raise inquiries to verify the authenticity of the offshore claim. In our experience IRD may raise the first inquiry after 3 years of company operations and will request the supporting documents for the period of these 3 years. These inquiries may include requesting for supporting documents such as contracts, invoices, and bank statements to prove that the profits are indeed sourced from outside Hong Kong. The IRD may also conduct interviews with key personnel of the company to gather more information about its operations.
How to react when the company receives the IRD inquiry letter?
If your company receives an enquiry letter from the IRD regarding the offshore claim, it is important to respond promptly and provide all the necessary information and documents requested. Failure to do so may result in the rejection of the offshore claim and potential penalties for non-compliance. We suggest that our clients keep all the records in tact and ready to be provided.
Is there a deadline for the offshore tax claim filing?
The offshore claim should be made within 3 months from the date of issue of the profit tax return. If the company fails to make the claim within this timeframe, it can still submit a late application within 2 years from the end of the relevant year of assessment. However, the IRD may impose a penalty for late submission.
How hard is it to obtain the offshore claim approval?
Obtaining an offshore claim is not a straightforward process and requires careful planning and preparation. The IRD may raise enquiries and request for supporting documents, which can be time-consuming and tedious. Therefore, it is advisable to seek professional assistance from a reputable accounting firm to ensure a smooth and successful application.
How much does it cost to obtain the offshore claim?
The costs of obtaining an offshore claim may vary depending on the complexity of the company's operations and the amount of work required by the IRD. Generally, the costs will include professional fees for preparing the application and responding to any enquiries raised by the IRD. It is important to discuss the costs with your chosen accounting firm before engaging their services.
Are there any risks associated with the offshore claim?
While the offshore claim can result in significant tax savings for companies, there are also risks involved. If the IRD finds that the company has provided false or misleading information in its application, it may reject the offshore claim and impose penalties for non-compliance. Therefore, it is crucial to ensure that all information and documents provided to the IRD are accurate and supported by evidence.
Conclusion
In conclusion, the offshore claim in Hong Kong is a valuable tax exemption that can benefit companies with profits sourced from outside Hong Kong. However, the application process can be complex and requires careful planning and preparation. Seeking professional assistance from a reputable accounting firm can greatly increase the chances of a successful application. With the help of BELANS, you can navigate through the process smoothly and enjoy the benefits of 0% tax on your offshore profits in Hong Kong.
