How To Qualify For Offshore Tax Exemption in Hong Kong

Hong Kong’s offshore tax exemption is a significant incentive for businesses looking to minimise their tax burden. With the right setup, companies can legally pay 0% tax on profits earned outside Hong Kong, but qualifying isn’t automatic. Understanding the criteria and providing solid evidence are key to securing this exemption.

This guide will help you navigate the process, breaking down what qualifies as offshore income, how to claim the exemption, and the evidence required so you can maximise your tax benefits and avoid common pitfalls along the way.

Hong Kong follows a territorial tax system, meaning businesses only pay a profit tax rate of 16.5% on assessable profits derived from Hong Kong-sourced income. However, profits earned from activities conducted entirely outside Hong Kong may be exempt from chargeable tax, as they are typically taxed in a foreign jurisdiction.[1] This exemption is not automatic, and businesses must apply for offshore tax status and provide sufficient evidence to support their claim for the relevant year of assessment.

To obtain offshore tax status, the company must file an Offshore Tax Claim (OTC) with the Inland Revenue Department (IRD). If approved, this status allows the company to be exempt from Hong Kong profits tax for 3 to 5 years before requiring renewal. 

This status is crucial for businesses operating globally, as it directly impacts their tax liabilities and overall profitability while helping to avoid double taxation.

One misconception that should be addressed is that offshore companies are automatically exempt from tax in Hong Kong. Many foreign entrepreneurs assume that simply incorporating an offshore company while doing business outside Hong Kong means they don’t have to pay taxes. In reality, company registration alone does not determine tax status. It’s about where the income is generated.

Let’s break down the difference:

• Offshore Companies: These are companies incorporated in Hong Kong but primarily operate outside the territory. While they benefit from Hong Kong’s global market access, financial infrastructure, and business efficiencies, their tax liability depends on where their income is generated, not their company status. Simply being an offshore company does not automatically grant tax exemption.
• Offshore Income: This refers to profits earned from business activities conducted entirely outside Hong Kong. Under Hong Kong’s territorial tax system, a company must prove that its income is offshore sourced to qualify for tax exemption. This requires providing sufficient evidence to the Inland Revenue Department (IRD) that no profit-generating activities took place in Hong Kong.

This means that a company must first be incorporated and registered with Hong Kong’s Companies Registry before filing an offshore tax exemption claim on income earned outside the jurisdiction. This policy reflects Hong Kong’s commitment to maintaining a business-friendly environment and fostering global trade and investment.

The key requirement to qualify for offshore tax exemption under Hong Kong’s territorial tax system is that your company must be incorporated as a limited company in Hong Kong. You must also obtain a Business Registration Certificate from the Inland Revenue Department (IRD) to prove your registration as a Hong Kong taxpayer. 

To set up a Hong Kong company, you will need:

1. At least one director, who can be a Hong Kong resident or a non-resident.
2. Minimum HKD 1 share capital.
3. Articles of Association.
4. NNC1 Incorporation Form.
5. A company secretary.

You can register the company yourself online or, for a seamless process, engage a professional incorporation service to assist with the setup, especially if you need guidance on offshore tax exemption requirements.

As the Inland Revenue Department (IRD) assesses whether a business qualifies based on where its income is generated, your business must not engage in trade, profession, or any commercial activities that generate profits from within Hong Kong. This includes having no physical office, employees, clients, warehousing, or fulfilment activities in the territory.

The IRD has listed the key principles for determining the source of profits, which include:

• Operations Test: Profits come from where the actual business activities happen, not just where the company is registered.
• Focus on Business Transactions: The key factor is where sales or deals take place, not other background tasks.
• Decision-Making is Not Enough: Simply making business decisions in Hong Kong does not automatically mean profits are from Hong Kong.
• Profits Are Judged Per Transaction: The IRD assesses each business deal separately to determine if profits are Hong Kong-based or offshore.
• Overseas Presence: Having offices or operations abroad makes it easier to prove offshore profits. Without one, profits are usually taxed in Hong Kong.

To put it short, offshore income refers to profits, revenue, or earnings derived from business activities, signed contracts, or transactions that occur entirely outside Hong Kong, with no connection to the local economy. If your business generates income through these means, it may qualify as offshore income and, therefore, not be subject to profits tax.

Let’s take a look at some examples of what qualifies as offshore income.

Under the Inland Revenue Ordinance (IRO), businesses must provide sufficient evidence that their profits are derived outside Hong Kong to qualify for offshore tax exemption.[2] To support an Offshore Tax Claim (OTC), entities are advised to maintain and provide comprehensive accounting records and documentation. These are essential for verifying the offshore nature of the income and include, but are not limited to:

• Company Address: Provide the addresses of the company's headquarters and any affiliated institutions, both within and outside Hong Kong.
• Organisational Chart: This chart details the company's structure, including an overview of the management hierarchy and operational scale.
• Certificate of Incorporation (CI): A copy of the official document certifying the company's legal registration in Hong Kong.
• Article of Association (AA): Documentation outlining the company's purpose, duties, and governance framework.
• Shareholders Agreement: An agreement that details the rights and obligations of the shareholders.
• Group Company Information: Provide detailed information about the parent group company, especially if your entity is a subsidiary. (if applicable)

• Contracts and Agreements: Key documents showcasing the negotiation, conclusion, and execution of contracts outside Hong Kong.
• Financial Records: Invoices and bank statements that trace the money flow in line with your business activities outside Hong Kong.
• Email Correspondence: Communications that provide additional context or evidence of where and how business decisions and operations were conducted.
• Outsourcing Documentation: Contracts and a detailed description of how these activities are monitored, emphasising the economic substance in Hong Kong.
• Economic Substance Records: This includes employee details (names, positions, salaries), office leases, and expenditures related to managing the company's operations or investments.

While Hong Kong's territorial tax system exempts most offshore income from taxation, an exception applies to certain types of foreign-sourced passive income to align with international tax standards. This is known as the Foreign-Sourced Income Exemption (FSIE) Scheme, which applies to multinational enterprises (MNEs) earning interest, dividends, intellectual property (IP) income, and equity disposal gains.[3]

MNEs earning these types of income must meet Economic Substance Requirements to qualify for tax exemption in Hong Kong:

• For non-pure equity-holding entities: Companies must have a solid operational base in Hong Kong. This includes hiring a sufficient number of local employees who are qualified for their roles and spending enough on local operations. These activities include making necessary strategic decisions and managing and bearing principal risks related to the assets they acquire, hold, or dispose of.
• For pure equity-holding entities: If companies primarily hold and manage equity investments, the requirements are a bit lighter. They must manage their equity investments effectively within Hong Kong, ensuring compliance with local corporate legislation. This typically necessitates possessing the appropriate human resources and facilities to manage these investments.

Claiming offshore tax exemption in Hong Kong involves a detailed understanding and careful navigation of the local tax laws. Here’s a structured approach to ensure a successful claim.

Step 1: Understand the Basics

It’s crucial to understand Hong Kong's tax system. Profits earned within Hong Kong are subject to tax, but foreign-sourced income can be exempt.

Begin by familiarising yourself with the Inland Revenue Department (IRD), which outlines the criteria for income to be considered foreign-sourced and the intricacies of OTC. Understanding the legal framework and guidance increases your chances of a successful OTC.

Step 2: Submit the Application and Required Documents

The application for offshore status should coincide with the filing of the first Profit Tax Return (PTR), which is due 18 months after incorporation. The Inland Revenue Department (IRD) will review the submitted documents thoroughly.

IRD can take more than 6 months for the offshore status examination.

Step 3: Engage Proactively With the IRD

Prompt and thorough responses to any IRD inquiries are vital. Effective communication and timely submission of further requested information are crucial for the smooth processing of your OTC.

Step 4: Approval and Maintenance

For a successful application, IRD will issue a letter of offshore tax exemption. This offshore status remains valid for 3 to 5 years. To maintain this status, annual audits are necessary to confirm your business activities remain offshore.

If your application is rejected, it's important to carefully review the reasons provided by the IRD. Some of the common reasons why profits tax exemption claims got rejected include:

• Having staff or operations in Hong Kong while claiming offshore status.
• Conducting sales or signing contracts in Hong Kong.
• Failing to provide strong evidence of offshore transactions.

You may need to submit additional information or clarify the details of your original submission to address the IRD's concerns. Seeking professional advice from a company secretary or a tax consultant can provide valuable guidance and increase your chances of a successful claim.

Understanding Hong Kong’s offshore tax status is just the first step. To maximise your tax benefits, ensure your business meets the necessary criteria and stays compliant. It’s important to keep in mind that a well-prepared application and proactive tax planning can make all the difference.

If you’re still considering whether to register your company in Hong Kong, book a call with Statrys to learn more. Statrys offers all-inclusive corporate services to help you seamlessly start and manage your Hong Kong company, from company incorporation to change of company secretary and multi-currency business accounts. 

The one-price package includes: 

✔️ Company incorporation – Includes name availability check, document preparation, and government fees

✔️ Company secretary services – Ensures compliance with statutory requirements, including filing annual returns (annual renewal)

✔️ Registered address in Hong Kong – Includes mail scanning and forwarding service (annual renewal)

✔️ Fully online process – Get your company set up in 5 business days