Hong Kong is an international financial centre with a unique position, and for overseas investors, companies set up in Hong Kong can enjoy some offshore exemptions and preferential measures.
NO.1. What is offshore exemption?
Offshore exemption means that the Hong Kong Inland Revenue Department (IRA) recognises the profits earned by a Hong Kong company as offshore income for the purpose of exempting it from taxation on its profits.
Under the territorial source taxation system adopted in Hong Kong, only profits derived from operations within Hong Kong will be subject to profits tax. If you can prove that the source of business profits is not Hong Kong when filing your tax return, you can apply to the Inland Revenue Bureau to treat it as offshore income for exemption from the relevant profits tax.
NO.2、How to apply for offshore exemption?
1. Requirements for applying for offshore exemption
1. Neither the supplier nor the customer is a Hong Kong businessman;
2. The signing process of the offshore exemption order does not take place in Hong Kong;
3. The goods have not been declared, received and shipped in Hong Kong;
4. Do not have a physical office in Hong Kong and employ Hong Kong employees;
5. No business records have been kept by the Hong Kong government;
6. It can only be a domestic offshore account, not a Hong Kong local account;
7. The Hong Kong company must have a real address in China (the lease contract is true and valid).
2. The process of applying for offshore exemption
01 Accounting audit
First, an audit is conducted, audited statements and reports are submitted to the tax office, and an offshore application is filed.
02 Submit an application
Submit the audited statements and reports to the Inland Revenue Department for application.
03 Inland Revenue Department issues offshore issue letter
After receiving the application for offshore exemption, the IRD will issue a letter to the company asking about offshore related questions and providing supporting materials to prove that the Hong Kong company's business is overseas and its profits are derived from overseas.
04 Write a reply letter and submit relevant information to the Inland Revenue Department
After receiving the inquiry letter from the tax bureau, it is necessary to explain according to its content and provide detailed business operation documents. Throughout the application process, the IRD may issue more letters in progress. It is important to reply to these letters, and it is advisable to seek the assistance of a professional body.
05 Result of the Inland Revenue Department's approval
After a series of enquiries and assessments, the IRD will issue an exemption consent letter if eligible; Otherwise, the relevant profits tax will be paid in accordance with the normal procedures.
NO.3. Precautions
1. For all questions raised by the tax bureau, it must be replied within a certain period of time (generally one month).
2. Offshore exemption is applied for in a single year, and the successful application of this year does not mean that it can be successful in the future, if you apply for offshore exemption while making a profit this year, then the tax bureau will issue a questionnaire, and you need to cooperate with the customer to provide information to review and determine whether you meet the conditions for offshore exemption.
3. If the Inland Revenue Department agrees that the company's operation is an offshore operation, it will issue a waiver consent.
In general, the IRD will not make further enquiries to the company for 2 to 3 years after the issuance of the exemption consent, but the decision of the IRD is final. Secondly, the Inland Revenue Department (IRD) will require the company to re-submit the documents every few years from time to time.