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Do Hong Kong offshore companies have to file tax returns? How to apply for offshore profits tax exemption?

Many people think that setting up an offshore company in Hong Kong does not need to pay profits tax. Is this true? How does the Inland Revenue Department define an “offshore company”? If I receive a Profits Tax Return, are there any relevant exemptions to prove that the profits are not derived from Hong Kong? This article will answer the above questions and make it easier for offshore companies to file tax returns.

Offshore companies do not pay profits tax?

Since Hong Kong adopts the territorial source principle for taxation, according to the Inland Revenue Ordinance, if the company is a trade, profession or business carried on in Hong Kong and obtains profits arising in or derived from Hong Kong from the trade, profession or business Profits tax is payable, while profits from elsewhere are not subject to profits tax in Hong Kong.

This principle also applies to companies incorporated in Hong Kong and overseas. As for whether an offshore company is exempt from profits tax, this question depends on the nature of the company’s business activities.

Further explanation, the Hong Kong Inland Revenue Department will, based on facts, check whether the company’s business activities and related profits are reasonably sourced from Hong Kong in each case. Even the business activities of agents in Hong Kong will be taken into consideration.

Offshore Profits Tax Exemption?

In view of the above problem, even if a limited company is established in Hong Kong, if it can be proved that the business of the company does not originate in Hong Kong, it can apply to the Inland Revenue Department for “offshore income” to be exempted from profits tax.

The Hong Kong Inland Revenue Department currently does not have a clear guideline on the requirements for “offshore income”, but if your company has the following conditions, you can declare offshore business to the Inland Revenue Department to obtain offshore company status and offshore profit tax relief:

• the customer or supplier is not from Hong Kong;

• There is no warehouse, physical office and no staff in Hong Kong;

• No products/services are supplied, imported, manufactured or traded in Hong Kong;

• No business records in Hong Kong and business agreements are signed outside Hong Kong;

• The director of the company does not stay in Hong Kong for more than 60 days per year.

According to the practice of the tax bureau, a general company only needs to apply for an offshore exemption once, and the company will be regarded as an offshore company for the next three years. Once 3 years have passed, the tax bureau will review and audit the company’s finances from time to time to determine the offshore status. Therefore, if there is a change in the company’s business, it should notify the Inland Revenue Department on the tax return or audit report for that year.

Documents required to apply for offshore profits tax exemption.

If wishing to apply for offshore profits tax exemption, the company should prepare the following relevant documents to prove that the profits are sourced from outside Hong Kong:

• Company registration information, including company registration certificate, shareholder agreement, company articles of association, scale, employees and their positions, salaries and benefits, organization chart, etc. (if the company is a subsidiary, the parent company details should be provided);

• The company’s business records, such as transaction contracts, trade records, etc.;

• Financial documents such as financial statements, audit reports, tax calculations;

• Hong Kong tax exemption application for offshore operation.

The above information is for reference only. If you have any questions about tax declaration and accounting, we welcome your inquiries.

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