Introduction to offshore exemptions
Hong Kong adopts the territorial source principle of taxation, i.e. only profits derived from Hong Kong are taxable in Hong Kong, while profits derived from other places are not subject to Hong Kong profits tax. In short, even if a limited company is established in Hong Kong, if the profits of the company's business are not derived from Hong Kong, the company can apply to the IRD for "offshore income" to be exempted from Hong Kong profits tax when filing its Hong Kong profits tax return.
The determination of the source of profits depends on the facts of the case and there is no general rule that can be generalized to apply to all different situations. Whether profits arise in or are derived from Hong Kong is determined by the nature of the profits and the nature of the transactions giving rise to the profits. Therefore, the Hong Kong Inland Revenue Department (IRD) does not have any clear rules on what kind of tax arrangement a Hong Kong company should make in order to fully comply with the profits tax exemption requirements for "offshore income".
Basic Requirements for Offshore Exemption Applications
1. Neither the supplier nor the customer is a Hong Kong client;
2. None of the order signing process occurs in Hong Kong;
3. the goods did not occur in Hong Kong customs clearance, receipt and shipment, etc.
4. No physical office in Hong Kong and employ Hong Kong employees;
5. not in the Hong Kong Government to keep any business records, etc..
Number of applications and intervals
As long as there is no change in your company's business, under the usual practice of the Inland Revenue Department (IRD), it is sufficient to apply for offshore exemption once and there is no need to apply for it every year.
If the application is successful, the IRD will review the application from time to time, depending on whether the company has been offshore for the following years. In our experience, it may be as short as once every two years, or as long as ten years or more, no review has ever been conducted.
If your business changes in a certain year, as long as it is clearly stated in the audit report and tax form, the IRD will issue another letter to inquire about the offshore nature of the new business, which is equivalent to the need to re-apply for offshore exemption.
Types of Businesses and Key Documentation for Offshore Exemption Applications
Trading company
1. company organization: including employee names, positions, duties;
2. products: what products are bought, list of products;
3. purchases and sales: suppliers and customers to find methods, bargaining methods (such as e-mail bargaining), the contract location and responsible staff, whether it is a Hong Kong company or affiliated companies (if applicable); at least the top 5 suppliers and customers of the transaction amount, name, address, and your company's staff in charge of (business trip location, time, business trip tickets, etc.); inventory location (if applicable); all transactions of the agreement, invoices, contracts, Customs declaration or bill of lading, letter of credit, insurance, transportation documents, e-mail, fax, etc. 4;
4. Receipt and payment methods: T/T, cash transaction, letter of credit or other means.
Income from services
1. the company's organizational structure: including the names of employees, positions, responsibilities;
2. service content, service staff (travel location, time, travel tickets, etc.), service location (the core requirements for determining the source of income, the more specific, the better, with documents to prove that it is better)
3. Information of the service fee payer: name, address, contact information with the company, etc. 4;
4. service contracts and invoices: signed staff, when to sign, where to sign, how to sign (e.g., by mail), etc.; service fee calculation criteria;
5. subcontractors (if applicable): name, address, criteria and amount of payment, content of services, location, etc;
6. information on bank accounts in Hong Kong.
Engineering income
1. company organizational structure: including employee names, positions, and duties;
2. location of works, nature of works, progress report of works, name and address of clients, etc;
3. works contracts, invoices, breakdown of works income, settlement methods, etc;
4. subcontractors (if applicable): name, address, amount subcontracted, contents and location of subcontracts provided, etc;
5. travel itinerary of directors or employees (place and time of travel, travel tickets, etc.)
6. Hong Kong bank account information, method of receipt and payment, etc.