Opening an offshore company in Hong Kong
4 minute read
Hong Kong is one of the prime locations to start a business. What makes Hong Kong a premier business destination is it’s easy access to the Asian market. In addition, many companies are attracted to Hong Kong because of the “potentially” tax-free benefit.
Benefits of starting an offshore company in Hong Kong
- Any offshore company can do business in Hong Kong and enjoy the pro-business environment, with no exchange controls
- Hong Kong does not require directors and shareholders to be residents
- A company in Hong Kong can be run without a physical presence or local staff
- If the company does not source its income from Hong Kong, then it is not liable for tax in Hong Kong
How to claim offshore company status in Hong Kong
The Internal Revenue Department (IRD) in Hong Kong invites businesses to claim offshore status. According to the IRD, only those profits that arise from Hong Kong are liable for the tax.
This means that, in order to get this tax exemption, a company must prove that they do not have a physical presence in Hong Kong. A company that qualifies for tax exemption does not need to pay 16.5% corporate tax on profits that a Hong Kong-based company must pay. However, in order to claim offshore status, there are a few things to take into account:
Current Effected Test
Since the profits that arise in Hong Kong are taxable, the Contract Effected test determines the taxability of income accruing from trading transactions inside Hong Kong. The most important factor here is the origin of the contract of purchase or sale, from negotiation to the sale. This is done to determine the source or location where the terms of the contract is executed. Key factors taken into account include:
- Processing of orders
- The mode of sales solicitation
- Procurement and storage of goods
- Arrangement of finances
- The mode of shipping
- Payment mode
The operations test is used for determining the source of profit-making for a business applying for tax exemption. Offshore-sourced income must meet the following conditions:
- No staff or decision-making in Hong Kong
- No business activities to be carried out in Hong Kong
- Proof that profits were not derived from Hong Kong
- Proofs of transactions that profits did not source from Hong Kong
- No longer than 60-day stay in Hong Kong by the director(s) in a tax year
It is important for taxpayers to prepare copies of all documents related to business operations to clear the test.
How to apply for offshore status
In order to open an offshore company in Hong Kong, it is important to prove that you are not benefitting from any of the local services. So it would help to keep clear bookkeeping records so that they can be presented when required. You also need to organize documents along with business contracts.
Filing for offshore status
When it comes to filing for an offshore status, you are able to renew the status every 3 years. Typically, you need to submit all proofs and documents to claim the status.
After the third consecutive year, you must file for the claim again to confirm that you are still doing the same business and are eligible for an offshore status.
Moreover, a yearly audit is mandatory so that you have all the proofs handy to vouch for your status as and when required by the CPA. The audit report and the documentation of business operations validate your claim as an offshore company. While you do not have tax liabilities as an offshore business on your profit tax return, it is still important to have the audit report handy along with a mention by the auditor that it is an offshore company.
When should you file for an offshore status?
The HK company should prepare for the offshore status by well documenting their receipts and working with their accountant to check if the company could be considered as offshore.
The filing for the offshore status is during the Profit Tax filing, which is around 18months after incorporation for new companies.
How long does the process take?
On average the process takes anywhere from 4-6 months to receive approval. The reason is that the IRD has a lot to do throughout the process.
In a nutshell, you can open an offshore company in Hong Kong and claim that status if you have no operations, clients, sales or business activities in Hong Kong. When you have all the documentation and proofs that validate your offshore claim, you can submit your application, telling about the nature of your work, business contract signed by a company based in Hong Kong, details of stock or warehouse in the jurisdiction, and the location of your company management.