Offshore tax exemptions in Hong Kong

tax exemption offshore

Contrary to popular beliefs that are villain oriented, just like in the movies that portrays the antagonist characters hiding their money in offshore accounts, it is however different in reality. Offshore companies are merely juridical entities that conducts business outside of their original jurisdiction where they are incorporated. Also in reality, offshore entities are tax havens since most jurisdictions that regulates these companies have lenient tax laws or tax exemptions that does not eat away your corporate profits.

Hong Kong provides a venue for offshore companies and businesses to thrive on. Some people may not have known that Hong Kong itself is considerably an offshore jurisdiction, but instead of a tax exemption, it provides low tax regulations. One perfect example of such is that in Hong Kong, profits emanating outside of the jurisdiction of Hong Kong are not subject to taxation.

Local companies in Hong Kong can file for an offshore status by way of offshore claim. Although the process is rigorous and requires a specific skill-set in terms of the application process in general, the goal though is beneficial in the long term scale.

Applications for offshore status by local companies can be availed and granted by the HK Inland Revenue Department (IRD). All applications for offshore claim is diligently screened and vetted through a complicated process. Upon approval, the validity usually range up to 5 years. It is important to remember that offshore status in Hong Kong is not retroactive, and any corporate tax payments made before gaining the status is not covered. Hence, the absence of an offshore claim can result to a company paying the actual applicable tax on profits that is required by law, regardless if those profits are derived from sources outside of HK.

Before filing for an offshore status, you should first evaluate whether or not you are qualified to avail of this privilege. Since the said status is granted by law, the applicant must ensure that they are covered under the realms of the law allowing the status to be given to companies. Otherwise, your application for offshore status will definitely be rejected on valid causes, and it boils down to the matter of not being eligible.

To give you an actual insight on what you should consider before filing for an offshore status. There are several tests that are conducted to determine if your company’s request can be granted by the IRD. These tests are conducted based on the nature of business of the applicant.

Contract Effected Test

This test is utilized in order to ascertain the taxability of the income accruing to the taxpayer engaged in a trading business. This phase is design to also gauge whether or not the purchase or sale contracts are executed in Hong Kong. Moreover, the IRD will look into the execution of the contracts by the company, particularly on how the goods are shipped, how sales are solicited, how orders are processed, how goods are procured and stored, and how payments are made.

Operations Test

If you are not engaged in the trading business or money lending, you will then be subjected to this test. For commission income, the test will scrutinize the origin cause of the income. If indeed the income emanated and took place in Hong Kong, and what has been executed to earn those profits and where was it rendered. Furthermore, enterprises are subjected to a different set of test, and they would normally gauge if you have no operational office in HK, no workforce are hired or employed in HK, no clienteles in Hong Kong, no suppliers in Hong Kong, contracts are not negotiated and executed in HK, goods should not be entering HK, service agreements or sales/purchase invoices must not involve any Hong Kong based entities, and the actual operation of the business is conducted outside of Hong Kong. If you meet these criteria, you have a chance in being granted with an offshore status.

Final thoughts

It is very important to know and to understand, that even if you meet the necessary requirements for an offshore status, it does not guarantee an approval from the IRD, since a thorough evaluation will be made to validate and verify all submitted documentations in the application process. Aside from this, there are several requirements that are mandatory to be submitted by the company itself which would involve the actual operation and conduct of business. Hence, all must be evidenced by irrefutable and valid documentations.


    Why Hong Kong is a perfect location for TECH Companies?

    Hong Kong TECH companies

    What are the best options?

    Tech companies are often fast growing, so their legal and business environment should facilitate their development. Hong Kong’s economy was rated the freest in the world from 1995 through 2019.

    The overall tax burden equals 14.1 percent of total domestic income. Government spending has amounted to 18.0 percent of the country’s output (GDP) over the past three years, and budget surpluses have averaged 4.0 percent of GDP. Public debt is equivalent to 0.1 percent of GDP.

    So, your Hong Kong Company will benefit from a steady environment with little to no changes in taxation when in the same time other countries will surely have to raise taxes after months “printing money” to support their economies.

    No sales tax or VAT -No withholding tax -No capital gains tax-No tax on dividends-No estate tax

    If your Tech Company should enter into a merger, an acquisition, being sold or combine forces with other markets players under any circumstances, Hong Kong will remain the best possible location.

    Option A – Zero Tax

    • Claim of offshore profits is prepared when (maximum 18 months after inception) audit and tax declaration are submitted. Pre-ruling is possible but expensive (circa USD 30K) and often useless as if the below rules are respected there are no issues
    • NO Hong Kong Director, employees, office warehousing, transit of goods, clients and suppliers. the main rule being:
    • No profits should derive from activities conducted, managed, controlled in Hong Kong.
    • Records keeping of proofs and demonstrations that the business is managed outside of Hong Kong, if we are in charge of a XERO accounting, instead of the client doing so, we could better follow-up the company activities.

    The advantage of this option is in the title, the risk is to see the shareholder’s country of tax residence claiming that the Company profits derives from an activity conducted in the shareholder/director country of residence and enforcing taxes.


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    Option B – Light Substance

    • Company is subject to profit tax (8.25 % the first USD 250,000 then 16.5 %)
    • Hong Kong Director with bank access (view or dual signatory)
    • Office located within the Director business environment/activities and not at a Corporate Services Provider address

    This option allows the shareholders to claim that all activities were conducted in Hong Kong, the HK tax authorities (Inland Revenue Department) will be happy to tax the company.

    But paying taxes in Hong Kong, or simply said in any country, doesn’t means that the Company has substance in the jurisdiction where profit taxes are paid. If the shareholder wish to benefit from a Double Tax Treaty Agreement then the Hong Kong Company would have to obtain a Tax Residence Certificate.

    In order to obtain the Tax Residence Certificate, the Hong Kong Company will have to demonstrate the below;

    1. Local resident Director with the abilities to 1. Formulate strategic policies 2. Determinate business directions 3. Organize the work plan 4. Decide on the mode of business financing 5. Implement management policies, work plan etc. 6. Evaluate the business performance
    2. The Director will organize the meetings in Hong Kong for the directors/partners to make resolutions with a description of the subject matters discussed.
    3. The company should hire employees besides administrative officers; this could be “solved” with an employment contract for the local resident Director.
    4. The fix place of business should be in Hong Kong, an office lease (sublet) would suffice
    5. The main banker should be in Hong Kong.

    The Option B – with a light substance, could then suffice when the shareholders are not residents in a country with a double tax treaty agreement with Hong Kong or simply said when the risks of being taxed (in their country of residence) on the Hong Kong Company profits, are considered as too low to implement a more sophisticated solution.


      Option C – Hong Kong Substance

      • Experienced Hong Kong Director
      • Employment contract for the Director paying retirement taxes and insurances
      • Bank signatory power, individual with main bank in Hong Kong
      • Lease agreement in Director’s office or at a separate fully dedicated to the company location.
      • Multiples substance related actions, including meeting with clients/suppliers.

      This option could/will match the requirements to obtain the Hong Kong Tax Residence Certificate and has the advantage of a public exposure in accordance with what are expecting banks and business partners.  

      Agreements impacting the Hong Kong Company profits

      Tech companies are facing specific issues, the companies are working “in the cloud” and ends up having their substance spread into different continents.

      Employees are often very talented freelancers working from home, instructions and meetings are taking place online, administration is often weak in term of demonstration/proofs of activities.

      A Hong Kong company could have from inception a profit-sharing agreement with another company which will provide the skills, knowledge, human resources, network and potentially a loan to the company and in exchange of part of the profits.

      Correctly worded, with a calculation based on the profits calculated quarterly. The agreement is to be stamp duty for date validation.


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