Offshore Company’s Guide to Tax Exemption in Hong Kong
9 minute read
There is no doubt that Hong Kong is an attractive location for new business owners. If you have intentions of setting up a company internationally, Hong Kong may just be the right place.
Hong Kong is right there at the top when it comes to the best places to do business in the world. It is a great fit for conducting banking activities, international trade, investment activities and asset protection. Additionally, the People’s Republic of China permits Hong Kong’s autonomy and financial freedom apart from mainland China. That is one of the reasons why Hong Kong taxes are among the lowest in the world.
The jurisdiction of Hong Kong has a simple tax structure that really allows for easy company setup. Its corporate income tax stands at only 16.5%. But, the best bit is that Hong Kong companies are not liable to pay tax for their profits earned outside of the autonomous region.
So, if you are planning to establish a Hong Kong company, you should most certainly learn more about tax procedures, including tax exemption.
If you want to find out more about tax exemption in Hong Kong, take a careful look below.
- What is Offshore Tax?
- Is Hong Kong Tax-free?
- How much tax do you pay in Hong Kong exactly?
- Does Hong Kong tax foreign income?
- Who qualifies as a Hong Kong Offshore Company?
- Process and Timing
- Documents Required
What Is Offshore Tax?
Many are already familiar with the term offshore tax shelter. For example, if a business owner wants to avoid paying taxes in the US, they can easily move their money into offshore tax shelters. And Hong Kong is considered to be one such ‘shelter’.
Simply put, offshore tax shelters create legal loopholes to defer taxation on investments. Specific investment strategies are used to minimize or dodge tax liabilities by putting off payments.
So, instead of paying income tax on investment contributions for a given year when money earned, they are included in taxable income for the year in which they are withdrawn (in most cases, many years later). A lot of taxpayers fall into a lower bracket after retirement, enabling them to lower their current tax liability and pay a lower rate later on.
Finally, there are white hat tax shelters such as 401(k)s and IRAs that are commonly used to the taxpayer’s advantage. On the other hand, setting up an offshore company is seen as a black hat strategy in the eyes of the authority (in this case, the IRS).
Is Hong Kong Tax-free?
You may think that Hong Kong is one of the leading financial capitals of the world because many claim that this region is tax-free. After all, that would be no surprise since many of the world’s leading banks have operations there. And, the island also has the second-largest stock exchange in Asia.
However, the island is certainly not tax-free. The reason why wealthy foreigners flock there is because the taxes are low. If you earn your money in the region, you pay approximately 15% in taxes and that is considerably lower than taxes levied on salaries and wages in Europe and the US.
On top of that, corporations pay approximately 17% in taxes on profits generated in Hong Kong. However, the autonomous region does not charge tax on capital gains, interest, and dividends. Non-residents who keep their money in Hong Kong pay no net-worth taxes and no public benefits taxes.
High-net-worth individuals who don’t keep their financial assets in Hong Kong can still benefit from going on Hong Kong shopping sprees since shoppers pay no sales tax on their purchases.
How much tax do you pay in Hong Kong exactly?
Assessable profits of corporations are taxed at the corporate tax rate of 16.5%. However, there are various tax incentives for special business operations, such as tax exemption for profits derived by offshore funds (offshore tax exemption Hong Kong) and profits derived from operating ships in Hong Kong.
Profits derived from the business of reinsurance of offshore risks as a professional reinsurer and profits of a qualifying Corporate Treasury Centre are taxed at half of the corporate tax rate.
Does Hong Kong tax foreign income?
This question is most likely the reason why you are reading this article. And the answer will make you happy. No!
The tax rate on foreign-sourced income stands at 0%! This is exactly the reason why Hong Kong is seen as a safe haven for many entrepreneurs coming from the West.
Who Qualifies as a Hong Kong Offshore Company?
Your Hong Kong company qualifies for Offshore Profits Tax Exemption once it carries out all its activities outside of Hong Kong. Profits tax exemption is granted by the tax authority under the Inland Revenue Department of Hong Kong. If you want to gain a better understanding of what makes an offshore company, below are some examples of activities that would qualify for offshore profits tax exemption.
- The company has no customers or suppliers in Hong Kong.
- The owner or employees of the business entity operate their Hong Kong company solely outside of Hong Kong.
- The company provides no services in Hong Kong.
- Your services and products are not available in Hong Kong.
- The day-to-day business decisions and service agreements are signed outside of Hong Kong.
- The company has no employees based in Hong Kong, and the owner or any overseas employees rarely visit Hong Kong.
- The company’s products do not enter Hong Kong.
It’s also worth noting that the territorial concept has always been fundamental to the taxation of profits tax in Hong Kong. Only the profits that arise in or are derived from Hong Kong are liable to profits tax in that country.
For example, if a Hong Kong company negotiates and concludes the terms of the purchase and sale contracts with suppliers and customers outside Hong Kong while also carrying out the relevant operations outside of Hong Kong, it is possible to claim that the trading profits are non-taxable in Hong Kong.
Process and timing
It is recommended to make offshore application as soon as filing profit tax return for the first period (18 months after the incorporation date). The examination will go smoothly when corporates can specifically prepare required documents for IRD.
The application of offshore claim has to be submitted at the same time with PTR filing. The first PTR must be filed when the corporation is 18-months old. The next periods of PTR are every 12 months after.
The process will take several months, since IRD will examine details during their investigation before making the final decision. On top of that, the time frame depends on the company structure.
- Firstly, IRD inspects submitted documents from the subject companies with their Corporations and Partnerships Unit.
- Afterward, their Unit of Field Audit and Investigation might get involved in the process if there is any sign of tax elimination.
- A letter of offshore tax exemption will be granted after the company’s documents and clarification have convinced IRD that the company should be tax-exempted.
The offshore status maintains its effect for a maximum of 3 to 5 years. However, you need to perform annual auditing to state with IRD that your business in Hong Kong still remains offshore.
Auditors require the collection of the following from the company:
- Invoices and contracts
- Bank statements
- Expense receipts
Also, you should submit the following documents with the profits tax return to IRD:
- Completed profits tax return
- Auditor’s report
- Tax computation claiming offshore tax exemption (if applicable)
If you want the whole process to run smoothly, it is recommended that you maintain all the records to show that all the transactions and activities of the company took place outside of Hong Kong.
- Correspondence with customers and suppliers (phone, email, fax, etc.)
- Travel documents, visa stamps (to see when and where you visited)
- Purchase orders
- Sales orders
- Shipping documents
- Meeting memos
It can’t be denied that Hong Kong companies enjoy a number of benefits. Some of them include limited liability, complete foreign ownership, access to the Mainland China and other Asian countries, low taxation, shareholder privacy and so on.
If you, too, are interested in reaping the maximum benefits of this tax haven, feel free to reach out to Sleek. We are able to help with your company’s accounting and finances matters including tax exemption. With our team of experts, we are confident to make the process as easy, seamless and convenient as possible so that you can reap the benefits you deserve!