Offshore company in Hong Kong? But what is it really good for?
Introduction
Yes, it is true:
With a Hong Kong offshore company, you can pay 0% taxes.
But you may have many questions, such as:
- when is a company classified as an offshore company
- how is it possible to apply for the tax exemption of 0% for corporate tax
Spoiler alert:
Not everything is sunshine – to become 0% tax-free, there is a strictly detailed process involved by the Hong Kong tax department, called HK IRD (Hong Kong Inland Revenue Department).
Who should read this article?
Read this article if you
- are self-employed with customers outside of Hong Kong
- have a Hong Kong business already, but are not sure how to claim the 0% offshore benefit
Why you should read this article?
Many business owners make many mistakes when applying for the tax exemption, resulting into not being granted the offshore tax exemption.
Read this article to avoid such mistakes. Ready? Let’s dive in!
1 – Offshore company Hong Kong: Client story from 2019 until 2024
The best theory is explained through an example. Here we have picked one of our clients’ roadmap to apply the tax exemption of 0% to his Hong Kong company.
Offshore company in HK: Client’s background
Our client is a German national residing in Bali, Indonesia.
He runs Amazon stores in five different markets around the world—
- Japan,
- the USA,
- France,
- Germany,
- and the UK
excluding the Hong Kong market (this is important!). He ships products from factories in China, distributed by Amazon FBA services.
The whole setup is outside Hong Kong:
- no vendors,
- no warehouses, or
- no employees are located in Hong Kong.
Instead, the client has freelancers in the Philippines and Thailand.
So, he fulfills the prerequisites two prerequisites for an offshore company:
- no customers in Hong Kong
- no operations in Hong Kong
Let’s analyze his 0% profits tax journey, starting from five years ago when he incorporated the Hong Kong LLC.
⏰ Year 2019, January.
Incorporation
He incorporated the company with us and started running the business with our tax advice on setting up banking and maintaining the offshore status through proper documentation.
Further reading:
Read more about the timeline and roadmap for the registration of a Hong Kong company.
⏰ Year 2020, June (18 months later)
Filing of the 1st Profits Tax Return and Applying for Offshore Exemption
The company received the 1st profits tax return 18 months after incorporation. We helped file the return with audited financial statements concluding offshore status. The caption of our audit report is in the screenshot below.
What did we do for the application?
In the profits tax return, we simply filled the box declaring the offshore profits to be exempt from the Hong Kong profits tax (see screenshot below).
⏰ Year 2020, December
Tax assessment
The company received the assessment. Although the “OFFSHORE CLAIM IS SUBJECT TO REVIEW” (see screenshot below) the Hong Kong tax authorities did not require any profits tax payment for the year.
⏰ Year 2021, November & 2022, November
Filing of the 2nd and 3rd Profits Tax Returns
The same process repeated for the 2nd and 3rd tax years. We continued auditing and reviewing the offshore status, advising on documentation and operation flow to meet offshore requirements. For example, advise the client to organize and keep the key transaction documents, like
- Amazon’s report,
- transactions
- corresponding emails,
- shipping details,
- inventory record,
- freelancer’s working record, etc.
Filing offshore-based profits tax returns and audited financial statements resulted in tax assessments, with no profits tax payable.
⏰ Year 2023, May
Tax investigation
After the 3rd profits tax return filing (after 3 years of opening the company), he received a tax investigation letter from HKIRD in May 2023 as below, requiring a response within 2 months.
We prepared and answered the queries with intensive documentation prepared within the last 3 years for every audit.
Because we handled the audit throughout the years, we understood the client’s operation and documentation flow well, finalizing and filing the reply after just one initial online meeting and discussion with the client.
⏰ Year 2023, October
Approval of Offshore Claim
As expected, we received approval of offshore status, implying the company was approved for the 0% offshore profits tax exemption.
What’s next?
In our experience, the HKIRD will only conduct a simple review in the 6th year if the company continues to claim offshore status.
Documentation must continue to be maintained.
If you want to know whether you are also eligible for the 0% tax exemption as an offshore company, book a free consultation call with a legal expert to calculate your tax liabilities.
2 – Offshore Company Hong Kong: Understanding the basics
2.1 What is an offshore company in Hong Kong?
An offshore company in Hong Kong needs to fulfill the following requirements:
- it is based in Hong Kong (incorporated in Hong Kong)
- its revenue comes from customers based outside of Hong Kong
- it has no operations in Hong Kong (no employees or other facilities except for an office)
2.2 What is the tax rate for an offshore company in Hong Kong?
0% corporate tax if you are eligible for the tax exemption (offshore claim).
If not, it is:
- 8.2% of your revenue until HK$ 2 Million (around US$ 256k)
- 16.5% of your revenue that exceeds HK$ 2 Million
2.3 What is an offshore claim for an offshore company in Hong Kong?
Under the territorial basis, an offshore claim system allows your business to be exempt from Hong Kong Profits Tax on income sourced outside Hong Kong. As in the case study, all income was driven from overseas markets, not Hong Kong. In other words, an offshore claim allows your offshore business to pay 0% profits tax.
Remember, the offshore claim is an “EXEMPTION” – it is not automatically applied. The company must apply for it in its yearly profit tax return.
2.4 When am I eligible for an offshore company in Hong Kong?
The key to becoming eligible for an offshore claim is “Income sourced OUTSIDE Hong Kong.” The definition is simple and clear: the business is not carried out in Hong Kong.
Here are the circumstances that companies must meet to be eligible:
- No Customers in Hong Kong
- No Vendors in Hong Kong
- No Physical Offices and Employees in Hong Kong
- No Contracts Negotiated or Concluded in Hong Kong
- No Properties in Hong Kong
- No Management Personnel Working in Hong Kong
- No Web Hosting in Hong Kong
- No Business Performed in Hong Kong
- No Warehousing/ Fulfilment/ Shipping in Hong Kong
IMPORTANT: The Hong Kong Inland Revenue Department (“HKIRD”) takes a “totality of facts” approach to determine whether the profit is taxable or not.
2.5 What kind of businesses can apply for an offshore company in Hong Kong?
There is no rule limiting what kind of business or industry can apply for the offshore claim. Any company from any sector can apply for offshore tax exemption if its profits do not derive from Hong Kong. Here are some business types we have helped obtain offshore claims:
- E-Commerce, selling on Amazon, Shopify
- Digital Marketing Services
- Online Software Sales
- Mobile App Sales
- Consulting Services
- Rental from overseas Real Property
- Security Trading/Investment
- International Trading
2.6 How long does it take until the offshore company status for 0% tax is approved?
It takes up to 3 to 4 years.
Within the first three years of your Hong Kong company, the Hong Kong tax department just pre-approves your application.
In the 3rd year, they will finally make a detailed investigation (takes 3–6 months) until you finally receive the green light.
3 – Application Process
3.1 How to Apply for an offshore company?
As in the case study, the company simply needs to fill in the “box” for the offshore claim in the yearly profits tax return.
While the application is simple, more focus should be on preparation throughout the year, which can be tough and time-consuming without a trusted auditor for ongoing guidance. The tax investigation involves an intensive check of your operations, and documentation is key.
3.2 The Tax Investigation
Typically, HKIRD “pre-approves” in the first three fiscal years and then investigates in the 3rd application year. HKIRD will require detailed information with supporting documents to prove the source of profits. As seen in the case study, there were 21 long questions in 4 pages, divided into two areas:
Company’s background
That covers almost even part of the business. Here are some common areas the HKIRD would ask for:-
- Operation cycle
- Nature of business
- Customer base
- Suppliers base
- Place of the central management
Transactions details
The HKIRD would also select some transactions for detailed review. See the typical documentation they would require includes, but is not limited to:
- The correspondence with customers and suppliers that was related to the specific transactions (e.g. email, fax, telephone calls)
- The passport traveling records of the management or the key personnel in the company
- Purchase invoices, contracts
- Sales invoices, contracts
- Shipping documents for product sales
Important:
HKIRD has the power to determine and approve the offshore status of a company. There is also a chance that IRD will reject offshore claim requests.
In a free consultation call, we will tell you what the chances are for your specific situation.
3.3 Timeline of Offshore Claim
Summarizing the application and investigation process and client experience, the offshore claim is a long game.
The application is done yearly through the profits tax return, and the tax investigation process takes place in the 3rd year of the application, then up to 3–6 months for approval review.
Getting the official offshore status may take around 3-4 years. However, HKIRD generally does not request provision or prepayment in advance of the offshore claim approval.
3.4 What To Do When The Company Receives The HKIRD’s Enquiry Letter?
When you receive an inquiry letter from HKIRD, you have two options:
- Option 1: Do it yourself – If you are knowledgeable about Hong Kong tax rules, you can respond directly.
- Option 2: Seek professional help – It’s often advisable to appoint a tax expert to handle the response, due to the technical nature of the inquiries. Ideally, the company auditor can be responsible for answering the queries as they understand the company’s business operations best, such as the operation cycle or transaction flow. As in our case study, we prepared for the offshore claim from the beginning of the business, advising on documentation improvement throughout the annual audit review to secure the offshore status when the tax investigation finally came.
4. Conclusion
While the process of obtaining an offshore claim in Hong Kong involves careful planning and detailed documentation, the potential for 0% tax on foreign-sourced income makes it a compelling opportunity.
The offshore claim system is very serious; you can’t just walk in and sail through. However, Hong Kong’s tax system is well-known for its maturity, predictability, and flexibility, making it easier to navigate if you are well-prepared. By understanding the eligibility requirements, maintaining meticulous records, and consulting with experts, you can confidently tackle the complexities. Our client’s success story demonstrates the significant financial benefits that come with strategic tax planning. Ready to optimize your tax strategy? Schedule a free consultation with me and my team to ensure your business is fully prepared for the offshore claim process.
Questions other readers have asked.
Q1: When will I get the tax investigation regarding the offshore company in Hong Kong?
Typically, the Hong Kong Inland Revenue Department (HKIRD) investigates in the 3rd year of applying for an offshore claim.
Q2: What to do to make sure the offshore company investigation can be passed through?
An offshore claim is a long game. To ensure passing the offshore claim investigation, maintain meticulous records, prepare comprehensive documentation, and most importantly, partner with a professional CPA firm that is also knowledgeable in tax matters to guide you through the process.
Q3: What if I fail the offshore company Investigation?
If you fail the offshore claim investigation, your company will be subject to Hong Kong profits tax on the income that was previously claimed as offshore. There is a system for the company to appeal any unfavorable decision; however, you may need to proactively provide more information to support your claim.
Q4: Can I handle the offshore claim Investigation?
Yes, you can handle the offshore claim investigation yourself if you are knowledgeable about Hong Kong tax rules. However, it is advisable to seek professional help due to the technical nature of the inquiries.
Q5: Will it cause problems with offshore status if the company uses the Hong Kong banking system for offshore business?
Using the Hong Kong banking system for offshore business generally does not affect the offshore status, as long as the income is sourced outside Hong Kong and other eligibility criteria are met.
Q6: How do I register an offshore company in Hong Kong?
Please refer to our other article for more information.
Q7: How long does it take to get offshore status?
Getting an official offshore status may take around 3 to 4 years, including yearly applications and the investigation process.
Q8: What is the risk of being rejected?
The risk of being rejected depends on the thoroughness of your documentation and compliance with eligibility criteria. Proper preparation that starts at the very beginning of your business can mitigate this risk.
Q9: Did Reachtop fail in any offshore claim?
Fortunately, we have never failed in any offshore claim. Thanks to our clients’ trust in following our advice from the beginning of incorporation and during the annual audit review, all offshore cases were well-prepared to ensure a clear shot.
Q10: Is offshore status temporary?
The offshore claim status is generally reviewed every few years, but with proper documentation and compliance, it can be maintained over the long term.
Q11: Is an offshore claim a tax loophole?
No, the offshore claim is not considered a tax loophole. It is a legitimate part of Hong Kong’s territorial tax system designed to exempt foreign-sourced income from profits tax.
Q12: Is it easy to get an offshore claim?
Obtaining an offshore claim involves a detailed and careful process, including maintaining meticulous records and passing HKIRD’s investigation. It requires significant preparation and adherence to regulations.
Q13: What are the risks of offshore claim?
The risks include potential rejection of the claim, leading to tax liabilities, and the possibility of tax implications in other jurisdictions due to international tax transparency agreements.
Q14: Is offshore claim a temporary tax policy?
No, an offshore claim is not a temporary tax policy. It is a permanent feature of Hong Kong’s territorial tax system that has been effective since 1947.
Q15: If I am the director of the company, will my travel to Hong Kong harm the offshore status?
No, as long as you don’t negotiate contracts or meet with clients or suppliers related to the company’s income-earning activities in Hong Kong during your trip.
Q16: Can the company own and use Hong Kong bank accounts to do business under an offshore claim?
Yes, for sure. Banking itself doesn’t count as part of your operation cycle since the bank transactions are conducted non-physically.