How To Qualify For Offshore Tax Exemption in Hong Kong (2024)

Are you an entrepreneur looking to open a business in Hong Kong to leverage Hong Kong's offshore tax exemption? You're in the right place.

This article will walk you through everything you need to know about offshore tax exemption in Hong Kong, including eligibility criteria, required documentation, and the application process to help you streamline the process of claiming offshore tax exemption in 2024.

What Is Offshore Tax Status?

Offshore tax status in Hong Kong refers to income not subject to local corporate profit tax because it is earned outside Hong Kong, which has already been subject to tax in a foreign jurisdiction. This status is crucial for businesses operating globally, as it directly influences their tax liabilities and overall profitability.

To grant “offshore tax status,” a company must file an offshore tax claim (OTC) with the Inland Revenue Department (IRD). This tax-exempt status remains active for around 3-5 years.

📌 Note: Offshore companies in Hong Kong must also apply for offshore tax status to benefit from tax exemption. It is not automatically granted.

Offshore Company vs Offshore-Sourced Income

Misunderstandings may arise regarding Hong Kong's tax exemptions, with some believing these benefits are solely for offshore companies. However, Hong Kong's tax laws are designed to be inclusive, accommodating a wider range of business operations beyond offshore entities. Firstly, let's differentiate two concepts:

• Offshore Companies: This applies to businesses incorporated in Hong Kong but primarily conduct their business outside the territory. This setup is attractive due to the tax efficiencies and the global market access Hong Kong provides while also benefiting from Hong Kong's business infrastructure.
• Offshore-Sourced Income: This refers to income generated from business activities conducted outside Hong Kong. Under Hong Kong's territorial tax system, such income, when earned by companies based in Hong Kong (onshore companies), may also qualify for tax exemptions.

Hong Kong's tax system operates on a territorial principle, taxing only the income generated within its territory. Onshore companies, or those incorporated in Hong Kong, may take advantage of this rule to seek tax exemptions for their international earnings.

Therefore, both offshore and onshore entities can leverage Hong Kong's tax system for their international operations and enhance financial efficiency, provided they fulfill the regulatory criteria. This tax policy highlights a commitment of the Hong Kong government to nurture a business-friendly environment that encourages worldwide trade and investment.

💡 Tip: Learn steps to set up an offshore company in Hong Kong.

Examples of Offshore-Sourced Income in Hong Kong

Let’s take a look at some cases and examples that are considered offshore-sourced.

• International Contracting: Profits from contracts that are negotiated, signed, and executed entirely with entities outside Hong Kong.
• Global Trading: Earnings from buying and selling goods that are both procured and dispatched outside Hong Kong's borders, ensuring the goods never physically enter Hong Kong. 
• Overseas Services: Income derived from services performed through agents based overseas. 
• Ecommerce: Revenue from ecommerce sales where the order processing, payment, and delivery occur entirely outside Hong Kong. 
• Utilisation of Intellectual Property (IP) Abroad: Royalties or other earnings from IP rights (patents, trademarks, copyrights) utilised outside Hong Kong.
• International Investments: Dividends or interest from investments in foreign companies or bonds unrelated to any business operation within Hong Kong.
• Foreign Real Estate Profits: Income from the sale or rental of real estate located outside Hong Kong.
• Overseas Subsidiaries: Profits repatriated from overseas subsidiaries that conduct their business activities entirely outside Hong Kong.

Eligibility Criteria for Offshore Tax Exemption

According to the Foreign Source Income Exemption (FSIE) regime, companies must meet specific criteria to take advantage of an offshore tax exemption. 

Membership in a Multinational Enterprise (MNE) Group

Companies should be part of a multinational enterprise (MNE) group. This includes companies that are either headquartered in Hong Kong or have significant operations in the city but are part of a larger international group. This global connection is key to qualifying for the exemption.

Economic Substance Requirement

It's essential for businesses to show that it has a substantial presence in Hong Kong. This means their business activities and operations must significantly contribute to the economy. The requirements differ depending on your company's role within the MNE group:

• For non-pure equity-holding entities: Companies must have a solid operational base in Hong Kong. This includes hiring a sufficient number of local employees who are qualified for their roles and spending enough on local operations. These activities include making necessary strategic decisions and managing and bearing principal risks related to the assets they acquire, hold, or dispose of.
• For pure equity-holding entities: If companies primarily hold and manage equity investments, the requirements are a bit lighter. They must manage their equity investments effectively within Hong Kong, ensuring compliance with local corporate legislation. This typically necessitates possessing the appropriate human resources and facilities to manage these investments.

📌 Note: The FSIE regime was amended to better align with international efforts to prevent tax evasion and ensure tax fairness, effective 1 January 2024. This includes broadening the regime to cover all types of property disposal gains.

 Required Documents

To support an Offshore Tax Claim (OTC), entities are advised to maintain and provide comprehensive accounting records and documentation. These are essential for verifying the offshore nature of the income and include, but are not limited to

Basic Information 

• Company Address: Provide the addresses of the company's headquarters and any affiliated institutions, both within and outside Hong Kong.
• Organisational Chart: This chart details the company's structure, including an overview of the management hierarchy and operational scale.
• Certificate of Incorporation (CI): A copy of the official document certifying the company's legal registration in Hong Kong.
• Article of Association (AA): Documentation outlining the company's purpose, duties, and governance framework.
• Shareholders Agreement: An agreement that details the rights and obligations of the shareholders.
• Group Company Information: Provide detailed information about the parent group company, especially if your entity is a subsidiary. (if applicable)

Business and Operation Record Documents

• Contracts and Agreements: Key documents showcasing the negotiation, conclusion, and execution of contracts outside Hong Kong.
• Financial Records: Invoices and bank statements that trace the money flow in line with your business activities outside Hong Kong.
• Email Correspondence: Communications that provide additional context or evidence of where and how business decisions and operations were conducted.
• Outsourcing Documentation: Contracts and a detailed description of how these activities are monitored, emphasising the economic substance in Hong Kong.
• Economic Substance Records: This includes employee details (names, positions, salaries), office leases, and expenditures related to managing the company's operations or investments.

How to Claim Hong Kong Offshore Profit Tax Exemption

Claiming offshore tax exemption in Hong Kong involves a detailed understanding and careful navigation of the local tax laws. Here’s a structured approach to ensure a successful claim.

Understand the Basics

It’s crucial to understand Hong Kong's tax system. Profits earned within Hong Kong are subject to tax, but foreign-sourced income can be exempt.

Begin by familiarising yourself with the Inland Revenue Department (IRD), which outlines the criteria for income to be considered foreign-sourced and the intricacies of OTC. Understanding the legal framework and guidance increases your chances of a successful OTC.

Submit the Application and Required Documents

The application for offshore status should coincide with the filing of the first Profit Tax Return (PTR), which is due 18 months after incorporation. The Inland Revenue Department (IRD) will review the submitted documents thoroughly.

IRD can take more than 6 months for the offshore status examination.

Engage Proactively With the IRD

Prompt and thorough responses to any IRD inquiries are vital. Effective communication and timely submission of further requested information are crucial for the smooth processing of your OTC.

Approval and Maintenance

For a successful application, IRD will issue a letter of offshore tax exemption. This offshore status remains valid for 3 to 5 years. To maintain this status, annual audits are necessary to confirm your business activities remain offshore.

What Should I Do When My Application Is Rejected?

If your application is rejected, it's important to carefully review the reasons provided by the IRD. You may need to submit additional information or clarify the details of your original submission to address the IRD's concerns. Seeking professional advice from a company secretary or a tax consultant can provide valuable guidance and increase your chances of a successful claim.

Final Note

Now that you’re more familiar with Hong Kong's offshore tax status, the next step is to assess how your business aligns with this legal framework. Keep in mind that proactive preparation and adhering to deadlines are crucial to sidestepping delays and optimising your tax benefits.