If you incorporate an offshore company in Hong Kong, chances are you can be exempted from profits tax. In this article, we’ll walk you through all you need to know about offshore tax exemption and how it benefits your Hong Kong business.
1. Hong Kong offshore company: An easily misunderstood term
Some offshore countries are considered tax havens for applying no corporate profit tax. Special company types such as international business companies (IBC) or business companies (BC) also exist for the purpose of tax exemption.
Hong Kong is normally seen as a tax-free jurisdiction like Belize, Seychelles, or BVI. However, the current tax laws of the country prove that it should be considered a low-tax jurisdiction rather than a tax-free one.
If you’re a foreigner establishing a local company in Hong Kong, you have permission to do business within its territory. Subsequently, you must pay a tax rate from 8.25 to 16.5 percent for your profit. This attractive tax rate is considerably low and is one of the best features of Hong Kong.
Even better, you can enjoy various tax incentives for special business operations such as tax exemption – if your profits are derived from sources outside Hong Kong, these profits will not be taxed.
An offshore tax claim is a process of proving the sources of your profits.
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2. Hong Kong Offshore Claim: A key to offshore profit tax exemption
In common offshore jurisdictions, a company formed under specific types (i.e., IBC or BC) is automatically subject to the offshore status from its incorporation date.
Contrastively, it can take a bit more time, effort, and paperwork for a local Hong Kong company to verify offshore status through offshore claims.
Offshore status for a local company is a Hong Kong tax exemption letter released by Inland Revenue Department (IRD) after their prudent inspection period. Obliged by Hong Kong laws, companies are tax-free for the profits derived outside the territory.
Without an offshore claim, your company must pay full profit tax despite your sources of income.
The process to get approval from IRD is quite long, not sooner than 6 months. However, it’s worthwhile since offshore status maintains its effect for 3-5 years.
In certain cases, your company may be eligible for particle offshore claim, meaning it has both onshore and offshore profits. For instance, you may have an office in Hong Kong for your trading business while running branches and agents oversea to handle trading transactions outside of Hong Kong.
You can apply for a partial offshore claim. Yet, it can be more complicated, time-consumed, and costly to prove to the satisfaction of the IRD.
Additionally, a partially offshore company will typically have to do offshore claims on an annual basis.
To determine the tax status of your income types and confirm your eligibility for making an offshore claim, try our Hong Kong Offshore Claim Tool.
2.1 Who is qualified for an offshore claim?
As mentioned above, Hong Kong Inland Revenue Department (IRD) has the power to determine and approve the offshore status for a company under a letter form.
Your company is requested to answer “Question to determine the source of profit” by IRD as exactly detailed as possible to avoid confusion and doubts.
There are also chances that IRD will reject your offshore claim requests. This unexpected situation occurs mainly because you cannot meet the requirements from IRD clearly.
Therefore, to raise the success percentage, you should ensure that your company satisfies these criteria:
Having no clients in Hong Kong
Running no physical office and having staff in Hong Kong
Hosting no website in Hong Kong
Performing no services, sales, and business in Hong Kong
Having no warehousing and fulfillment in Hong Kong
In addition, it’s recommended that you take every piece of advice from the Certified Public Accountant before making any submission to IRD.
2.2. When should you register for an offshore claim?
Some people might advise you to start the offshore claim progress right after your company is incorporated. Likewise, it is recommended to make an offshore application as soon as filing a profit tax return for the first period (18 months after the incorporation date).
The examination goes more smoothly and effectively when you can submit the required documents for IRD.
Profit Tax Return (PTR) is a mandatory part of the offshore status examination. Thus, you should submit the application for an offshore claim at the same time as PTR filing.
When your company is 18-month old, file the first PTR. The next periods of PTR are every 12 months after. Auditors require the collection of the following:
Invoices and contracts
To help the offshore claim process run fluently, though this list is not all-inclusive, you should prepare the following documents:
Trading proofs such as sales and purchase orders;
Meeting minutes with customers and suppliers
Travel documents for any visits to clients and suppliers
Phone numbers, email, fax as communication means to support the negotiation process with customers and suppliers.
The process can take several months as IRD will raise questions during the investigation before making a final decision.
Additionally, the timeframe depends on the structure of your company. The more layers your company has, the more thorough procedure, and the more it costs certainly.
Firstly, IRD inspects submitted documents from your company with the Corporations and Partnerships Unit. After that, the Unit of Field Audit and Investigation might get involved in the progress if there is any signal of tax elimination. You can receive a letter of offshore tax exemption after the company’s documents and clarification to persuade IRD.
The offshore status maintains effect for a maximum of 3 to 5 years, but you should remember to do annual auditing to state with IRD that your business still stays offshore. In case there are any changes, you should mention those in the auditing reports.
Thanks to the country’s significant reputation, no matter it is taxed or not, Hong Kong-based companies are able to gain more opportunities in the global market.
Besides the prestige, offshore status performs in enhancing the attraction as companies can save a large amount of annual expense. That is the reason why more and more entrepreneurs, business owners, and freelancers decide to incorporate in Hong Kong. Now, it is your turn!
If you have any questions about Hong Kong offshore claims and related matters, our friendly consultants are always ready to support and share with you practical advice. Free free to get in touch with us via email@example.com.
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