Offshore Tax Exemption in Hong Kong: How It Works & How to Qualify

If you’re running an international business from Hong Kong or considering starting one, you’ve probably come across the idea of offshore tax exemption. It’s one of the major reasons entrepreneurs and SMEs are drawn to Hong Kong: the chance to pay no profits tax on income generated from outside the city.

But here’s the catch.

Offshore tax exemptions are not automatic. Many business owners I have spoken to are surprised to learn that you have to apply for it, and more importantly, you need to prove that your income truly comes from offshore activities.

In this guide, I’ll explain how the offshore tax system works in Hong Kong, what qualifies as offshore income, and how to structure your operations and paperwork to improve your chances of getting that tax break. Whether you're just setting up or preparing to file your first offshore claim, this is your roadmap to doing it right.

Hong Kong’s offshore tax exemption is the tax benefit that allows businesses to legally avoid paying profits tax on income earned outside Hong Kong. Under Hong Kong’s territorial tax system, only active income derived from activities within Hong Kong is taxable, while foreign-sourced income can qualify for exemption.

To benefit from this exemption, you must show that your business’s income comes from genuine offshore activities and be prepared to provide clear evidence.

This is especially valuable for businesses that operate globally, as it can significantly reduce their tax burden and improve overall profitability.

Not all Hong Kong businesses qualify for offshore tax exemption. To be eligible, your business must meet both of these conditions.

• Your business is registered in Hong Kong
  Your business must be legally incorporated or registered in Hong Kong. This includes limited companies, sole proprietorships, partnerships, and branches of foreign companies.

And

• Your income is generated outside Hong Kong
  The profits you want to exempt must come from business activities carried out entirely overseas. It’s not enough to have overseas clients. The activities that earn the income must also happen offshore.

Next, let’s take a look at the steps you need to take in order to obtain offshore status. 

The key requirement to qualify for offshore tax exemption under Hong Kong’s territorial tax system is that your company must be incorporated 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.

If you’re registering a new business, there are a few requirements to keep in mind. For example, a private company typically needs:

• A unique company name
• At least one director - This can be a Hong Kong resident or a non-resident.
• Minimum HKD 1 share capital.
• Articles of Association.
• NNC1 Incorporation Form.
• A local 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.

In this step,  the Inland Revenue Department (IRD) will assess whether your business qualifies based on where your income is generated.

Your business must have no physical office, employees, clients, warehousing, or fulfilment activities in Hong Kong.

The IRD has listed the key principles for determining the source of profits. Here’s what they consider:

• Where Core Business Activities Take Place: Carrying out your main business operations outside Hong Kong is key to qualifying for offshore status. For example, if your company sources products from China and sells to customers in Europe, and none of the transactions take place in Hong Kong, your income may be considered offshore.
• Where Transactions Are Executed: The IRD focuses on where deals are negotiated, and services or goods are delivered. For example, if your company negotiates and delivers consulting services entirely outside Hong Kong, even if admin tasks are handled locally, the income may still qualify as offshore.
• Decisions Don’t Count on Their Own: Making high-level decisions (like pricing or marketing) in Hong Kong doesn’t automatically mean losing your eligibility for offshore tax status. The IRD looks at execution, not just planning.
• Each Transaction Is Reviewed Individually: The IRD assesses each business deal separately to determine if profits are Hong Kong-based or offshore.
• Overseas Presence Helps Support Your Claim:Having offices or operations abroad makes it easier to prove offshore profits. Without one, profits are usually taxed in Hong Kong.

To support your OTC, you’ll need to provide sufficient evidence to the IRD that your profits are derived entirely outside Hong Kong. Proper documentation and accounting records are essential.

Here’s a breakdown of the documents you may need.

Basic Information

• 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)

Business and Operation Record Documents

• 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.

If your company is part of a multinational enterprise (MNE) and earns passive income such as interest, dividends, and capital gains, there are additional rules to follow under Hong Kong's Foreign-Sourced Income Exemption (FSIE) Scheme. This scheme is designed specifically for MNEs and has extra conditions for claiming tax exemption.

To qualify for tax exemption under the FSIE scheme, MNEs earning passive income must meet the following conditions:

• For non-pure equity-holding entities: Your business must have a strong operational base in Hong Kong. This includes hiring qualified local employees, spending on local operations, and making strategic decisions here. Your company must also manage risks related to its assets in Hong Kong.
• For pure equity-holding entities: If your company mainly holds investments, the requirements are more relaxed. You just need to manage these investments in Hong Kong, comply with local corporate laws, and ensure you have the necessary resources to do so.

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 profit 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 actually benefit from it, your business must meet specific conditions and maintain clear documentation to support your claim.

If you're still in the early stages of setting up your business, our team can help you incorporate a company in Hong Kong with guidance on meeting offshore tax requirements.

Our 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.