An offshore company is a business that only conducts business outside of the formation country. Some offshore companies are regarded as residents of tax havens as the businesses are not subject to corporate profit tax e.g., BVI and Cayman Islands.
Although Hong Kong is not a tax haven, as it subjects resident companies to income tax, because Hong Kong only imposes tax on profits derived from inside of Hong Kong, a similar result can be achieved to incorporation in a tax haven.
If you register a Hong Kong company and your customers and suppliers are located outside of Hong Kong, then it is likely that your company will pay little or no tax in Hong Kong.
What is offshore tax exemption in Hong Kong?
A company is only eligible for the tax exemption on offshore income if the company’s business activities are carried on outside of Hong Kong and receive non-Hong Kong sourced income. As Hong Kong follows a territorial system, only profit generated inside of Hong Kong will be taxed.
Businesses and companies that are qualified for offshore tax exemption include:
- A business that operates entirely outside of Hong Kong
- A company that does not offer services in Hong Kong
- A firm that negotiates with its suppliers and customers who are outside of Hong Kong
- Business decisions and agreements are signed outside of Hong Kong
- Products and goods are not imported to Hong Kong
- There is no suppliers or customers from Hong Kong
- Directors stay less than 60 days per year in Hong Kong
Process and timing
The claim for tax exemption on your offshore income is made in the company’s profits tax return submitted to the Inland Revenue Department (IRD). The first profits tax return of a company is due 18 months after the incorporation date, and the next filings will be every 12 months thereafter.
The IRD will consider the application and it may take the IRD several months to complete the process as they will have to review the details before deciding. Included in their consideration of the application will be the structure of the company, how the offshore income is sourced by the company, whether any Hong Kong companies are involved as suppliers or customers and the day-to-day activities of any company personnel that are situated in Hong Kong.
Documents required for offshore tax exemption
The following documents should be submitted with the profit tax return to the IRD:
- Auditor’s report
- Completed profit tax return
- Tax computation claiming offshore tax exemption
As regards the audit report submitted to the IRD, Auditors will require the following documents from the company:
- Bank statements
- Expense receipts
The IRD may request the business to provide more documents and information to support the tax exemption claim. The IRD can pick out company transactions and verify whether the activities were carried out abroad or not. It is important that your company has maintained proper records to prove that all transactions and activities were carried out outside of Hong Kong.
The additional documents may include:
- Communication means such as phone numbers, emails and faxes with customers and suppliers
- Meeting memos with customers and suppliers
- Purchase orders
- Sales orders
- Shipping documents
- Travel documents and visa stamps to show when and where you visited customers and suppliers
Because of the offshore tax exemption in Hong Kong, many businesspeople are making this an opportunity to establish an offshore company in Hong Kong. Not only there is a tax exemption, but there are also many benefits from incorporating a company in Hong Kong.
Acclime has an established operation in Hong Kong and can help you with setting up your offshore company there.
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