Hong Kong offers good opportunity for offshore arrangements. Hong Kong’s territorial source principle of taxation renders only those profits which arise in or are derived from Hong Kong are subject to Hong Kong tax. The residence or citizenship of a taxpayer is not relevant at all.

It is well established that the following three conditions must be satisfied before a profits tax liability arises in Hong Kong:

1.	The person must carry on a trade, profession or business in Hong Kong;
2.	The profits to be charged must be from such trade, profession or business carried on by the person in Hong Kong; and
3.	The profits must be profits arising in or derived from Hong Kong.

In most cases involving offshore arrangements, conditions (1) and (2) are easily satisfied. For condition (3), the broad guiding principle is that “one looks to see what the taxpayer has done to earn the profits in questions and where he has done it”.

For manufacturing profits or service fee income, business profits/ income can arise partly in Hong Kong and partly elsewhere. It is required to determine how much of the profit arose in Hong Kong, if possible, on a rational basis in light of all the available facts and circumstances of the particular case. Where it is not possible to do so, the profit may be viewed as arising either wholly in or wholly outside Hong Kong subject to the most important elements of the source of the profit were located.

There are two usual ways to lodge an offshore claim:

•	making an application for an Advance Rulings before you put all your operation in place; or
•	lodging Offshore Profits Tax Exemption Claim when you file your tax return if your business has already been in operation.

There are pros and cons for each of the methods. Consult with a tax professional who could understand your business operation before choosing the appropriate way to proceed your case.

Source：Hong Kong Inland Revenue Department’s website

- https://www.ird.gov.hk/eng/paf/bus_pft_tsp.htm