Hong Kong is famous for its low tax rates and territorial taxation principle. In accordance with the territorial taxation principal, only profits arising in or derived from Hong Kong are chargeable to Profits Tax, currently at the rate 8.25% on assessable profits up to HK$2,000,000; and 16.5% on any part of assessable profits over HK$2,000,000. Profits derived from or sourced from other places outside Hong Kong are not taxable, or, free from profits tax.

Possibility of Tax Exemption Claim
Under the territorial taxation principle, it is possible and legal for a Hong Kong company to have its profits totally exempted from tax.

(1)     Trading Profits

In determining the locality of profits derived from a Hong Kong business, the Hong Kong Inland Revenue Department (“IRD”) will look at what the taxpayer has done to earn the profits in question and where he has done it. If the contracts for purchase and sale are initially negotiated, concluded and subsequently executed outside Hong Kong, there are grounds to claim the trading profits so derived as offshore sourced and non-taxable.

(2)     Service Income

If the services in question are physically performed outside Hong Kong, it is possible for the Hong Kong company to apply for tax exemption claim on the service fee income.

Our Professional Services

The Hong Kong company can request for the offshore profits tax exemption through filing its Profits Tax Return. The Hong Kong company subsequently would require to pass the tax surveillance as could be raised by the IRD. Sufficient information and documents have to be provided to the IRD to show that the whole operation and all the business activities of the Hong Kong company have been carried out by the directors/employees outside Hong Kong.

Offshore profits claim is a complicated tax service. Applicants are required to provide sufficient supporting documents to prove that their profits derived from or sourced from other places outside Hong Kong. The tests used to determine the source of different types of business profits are different, and the documents required are also different. Our preliminary review service will provide our critical professional advice on your business operation and the completeness of the company’s typical transaction. We have many successful experiences assisting our clients claiming tax free income/profits.