HK Taxation & Exemption

INTERSHORES I Offshore Exemption In Hong Kong

Hong Kong adopts the territorial source of principle for taxation, that is, only profits derived from Hong Kong are taxable in Hong Kong, while profits derived from other places are not subject to profits tax. In short, even if a limited company is established in Hong Kong, it can apply to the Inland Revenue Department (IRD) for those "offshore income" not derived from Hong Kong to be exempt from Hong Kong profits tax  when it submits its Hong Kong profits tax return. 


The IRD  has not clearly stipulated the rulings for exemption of  offshore income.  The source of profits must be determined based on the facts of the relevant case, so there is no general rule that can be applied to all situations. Whether the profit is generated in or derived from. It is usually determined by the nature of the profit and the nature of the transaction that generated the profit.


Basic requirements for offshore exemption application are as follows:


1.   Neither the supplier nor the customer is a Hong Kong merchant

2.    The order placement process (contract execution) does not occur in Hong Kong

3.    The goods have not been declared, received or shipped in Hong Kong

4.    The applicant does not have a physical office in Hong Kong and hires Hong Kong employees

5.    No operating records, etc. are kept in any department of Hong Kong government


Number of applications and interval

As long as your company's business has not been changed, you can apply for offshore exemption once.   According to the general practice of the IRD, you do not need to apply every year continously. 


If the application is successful, the IRD will consider the applicant company with offshore income in the following years and will review it from time to time.   It may be as short as once every two years, and as long as it has not been reviewed for more than ten years.


If the application company's business has changed in a certain year, as long as it is clearly written in the audit report and tax return, the IRD will issue a letter asking for details of the offshore nature of the new

business, ie. new application of offshore exemption.


The usual key documents require for offshore exemption are as follows :


1.    Trading company

- Company organizational structure: including employee names, positions, and responsibilities

- Product:  the types of products involved and product list

- Purchases and sales: suppliers and customers solicitation method;  transaction negotiation (e.g. Email communication); contract execution location and responsible staff; at least the top 5 suppliers details; the customer's name & address, transaction amount; and the applicant company's responsible staff (travel location, time, travel documents, etc.); inventory location (if applicable); all transaction agreements, invoices, contracts, customs declarations or receipts and invoices, letters of credit , Insurance, transportation documents, emails, faxes, etc.

- Receipt and payment methods: T/T, cash exchange, letter of credit or other channels.


2.    Service income

- Company organizational structure: including employee names, positions, and responsibilities

- Service content, service staff (travel location, time, travel receipts, etc.); service location (the core requirements for determining the source of income, the more specific the better, and the documentary proof is the best)

- Information of the person paying the service fee: name, address, contact information with the company, etc.

- Service contracts and invoices: the responsible staff, when, where, how to sign (such as mail), etc.; service fee calculation standards

- Subcontractor (if applicable): name, address, payment standard and amount, service content, location, etc.

- Hong Kong bank account information.


3.    Project revenue

- Company organizational structure: including employee names, positions, and responsibilities

- Project location, project nature, project progress report, customer's name, address, etc.

- Project contracts, invoices, project revenue schedules, settlement methods, etc.;

- Subcontractor (if applicable): name, address, subcontract amount, subcontract content and location provided, etc.

- Directors or employees' business travel schedule (business travel location, time, business travel notes, etc.)

- Hong Kong bank account information, payment methods, etc.


If you want to know more, please do not hesitate to contact us:


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Whilst reasonable care has been taken in provision of information above, it does not constitute legal or other professional advice. INTERSHORES does not accept any responsibility, legal or otherwise, for any error omission and accepts no responsibility for any financial or other loss or damage that may result from its use.  In particular, readers are advised to take appropriate professional advice before committing themselves to any involvement in jurisdictions, vehicles or practice.









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