Hong Kong is globally appreciated for its open and attractive foreign investment policies, from low tax rates to its business incubators. However, even more impressive is that a company incorporated in Hong Kong can actually be completely exempt from profit tax if said profits come from outside of Hong Kong.
While Hong Kong prides itself on its efficient regulation, there is still of course some red tape to cut to optimise your taxes fully. This article will go over the key facts for exemption on taxes from corporate profits in Hong Kong.
Hong Kong Tax Overview
The tax-friendly nature of operating in Hong Kong is often touted, but many may not know what they actually entail. Before we get into the detail of profit tax exemption, let’s take a quick look at the major tax benefits for a company incorporated in Hong Kong.
- Simple tax structures
- Territorial tax system (only income earned in Hong Kong is taxed)
- No restrictions on company incorporation
- Tax incentives
- Low tax rate
- Profit tax exemptions
While Hong Kong is not entirely free of tax obligations, as you can see, it’s a far more complementary system for corporations wishing to minimise their tax responsibilities.
What Is Hong Kong Profit Tax?
Again, to dispel any misinformation, any profits derived by any business within Hong Kong are taxed. All taxes are payable to the Inland Revenue Department (IRD) of Hong Kong.
Hong Kong has a two-tiered tax rate. Generally speaking, the first $2 million in profits are taxed at 8.25% for incorporated businesses and 7.5% for unincorporated businesses. Profits above $2 million will be taxed at 16.5% for incorporated businesses and 15% for unincorporated businesses. There are some exceptions, so feel free to read more about Hong Kong’s two-tiered tax system.
Is Foreign Income Taxed in Hong Kong?
Advantageously, Hong Kong does not tax foreign income, thanks to their generous territorial tax system. If a company’s revenue is created outside of Hong Kong, it can apply for a tax exemption.
How Does a Company Become Eligible for a Profit Tax Deduction or Exemption?
Profit tax deductions or exemptions are handled and administered by the IRD. The company will need to be incorporated in Hong Kong and have offshore activities — to do this, the company needs to apply for offshore status with the IRD and prove that its income is from offshore.
Related Read: Guide to Tax Filing Compliance in Hong Kong »
How Does a Company Qualify for Offshore Status in Hong Kong?
To qualify for Offshore Status in Hong Kong, the company must prove that it has none of the following:
- No services
- No products
- No suppliers
- No customers or clients
- No staff
- No physical office
- No warehousing
- No web hosting
- No directors who stay or live in Hong Kong 60 days or more per year
Once qualified for offshore status, that status will stay active for three to five years, depending on the business. The company can apply to renew its offshore status after three years. This requires an audit from the IRD.
What Profits Are Exempt From Tax in Hong Kong?
To qualify for Hong Kong’s profits tax exemption, a company must also prove that all of its business activity happens outside of Hong Kong.
Even if only a portion of a business’s profits come from outside of Hong Kong, it may still be able to qualify for a partial tax exemption/deduction, but it will take a bit more time and effort due to a more rigorous qualification process. If this is the case with your company, we recommend you consult with a certified public accountant.
What Documents Are Needed for Apply for Profit Tax Deduction or Exemption in Hong Kong?
First and foremost, to apply for a profit tax deduction or exemption, a company will need an annual financial statement audit from the IRD. It’s also recommended the company keeps other relevant financial documentation and proof of transactions that demonstrate offshore trade or activity. Things like statements, invoices, or contracts would be considered proof of offshore activity. To be thorough, we also recommend you include things like phone records, meeting minutes, or travel records.
What Is the Application Process for Offshore Status and Profit Tax Exemption in Hong Kong?
When Should a Company Apply for Offshore Status?
A Hong Kong company should apply for offshore status upon filing its first profit tax return which is approximately 18 months after incorporation.
When Should a Company Reapply for Offshore Status?
Once a company receives its offshore status, it will need to reapply for the status every 2-3months. Any changes to its operations must be disclosed during reapplication.
What Should a Company Submit for Offshore Status?
A company should submit its profit tax return, audit report, and any supporting documents that substantiate offshore trade.
How Long Does the Application Process Take Offshore Status?
The IRD will generally take 6-12 months to approve or deny an application for offshore status.
Conclusion — Where to Next for Getting a Profit Tax Exemption in Hong Kong
Although it is entirely possible to get a profit tax exemption yourself, we strongly recommend you seek the advice of a registered and competent Hong Kong tax service provider. By delegating the task to experts, it will almost always save you time, frustration, and money.
If you’d like help facilitating your offshore status application to obtain a profit tax exemption, InCorp has an expert team of specialist accountants to help you ensure the successful optimisation of your tax responsibilities.
If you have any questions about how you can reduce your tax burden even further in Hong Kong, please do contact us — it’s both our job and pleasure to assist.