Offshore tax exemptions in Hong Kong

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.


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