How Profit Tax Exemptions Work for Hong Kong Companies
In Hong Kong, tax exemptions are applied to profits received from offshore funds. Hereâs how to apply so your offshore company can benefit.
As youâve probably learned, running a company comes with the inevitable; paying taxes. But what if there was a way to reduce your bill? Good news, there is. If your businessâ profits come from outside Hong Kong, it could be in line for a tax exemption, a.k.a. tax break or profit deduction. Profit tax exemptions and deductions for companies in Hong Kong are special regulations that encourage business growth and investment.
So, what are the conditions surrounding profit tax exemptions? And more importantly, how can your business qualify for them? In this article, weâll dive into Hong Kongâs taxation system and unveil which profits can get tax relief if youâre operating as an individual or run an incorporated company. Weâll also break down Hong Kongâs eligibility requirements and how to apply for a tax exemption. Letâs dive in.
The Costs of Hong Kong Profit Tax
Does Hong Kong Tax Foreign Income Profit?
Eligibility for a Profit Tax Exemption
What Is an Incorporated Company With Offshore Activities?
Which Profits Are Exempted From Taxation in Hong Kong?
I Want To Apply for a Profit Deduction. What Documents Will I Need?
Process & Timeline To Apply for Profit Tax Exemption
Conclusion
Taxation in Hong Kong
Taxation in Hong Kong is unique in that the government excludes many commonly taxed activities and transactions from assessable income. For example, thereâs no VAT, GST, withholding taxes, or interest. Thereâs also an estate tax exemption, personal loan tax exemption, and property tax exemptions for organisations.
Now, this isnât to say the region is tax-free; youâll still have to cover the tax bill for things like property purchases as an individual and salaries tax on income earned in Hong Kong. But thereâs no denying Hong Kongâs tax system is business-friendly and accessible. Some key perks of the taxation system in Hong Kong include:
- A territorial tax system (more on this in just a second)
- Simplified tax structures
- Low tax rates
- No restrictions on business registration
- Tax incentives
- Profit tax exemptions
So what is a territorial tax system?
A territorial tax system uses the principle that a government only taxes income an individual or company earns within a specific area, e.g., funds a business generates within Panama. Hong Kong applies this principle to residents, non-residents, individuals, and corporations executing a business, trade, or profession with the region. So it's worth checking whether territorial tax applies to you.
The Costs of Hong Kong Profit Tax
Now we have some backstory on taxation in Hong Kong; you may be wondering what your tax bill will look like.
The Inland Revenue Ordinance (IRO) of Hong Kong has set up a two-tiered tax rate, which to applies all local profit. Any income that falls outside of this bracket could prime for a tax exemption. In Hong Kong, the tax rate for the first-year assessment is lower than in subsequent years to lessen the financial load on SMEs. Hereâs a quick snapshot of Hong Kongâs current tax rates:
Tax Rate | ||
Assessable profits | Unincorporated businesses | Corporations |
First HK$2 million | 7.5% | 8.25% |
Over HK$2 million | 15% | 16.5% |
(Check out this Q&A for more info on the two-tiered tax rate).
The Hong Kong government doesnât leave out individuals with income from foreign sources. You can claim a full or partial salaries tax exemption depending on your tax residency certificate status. Hong Kong also has a provision for a personal loan tax exemption; which allows you to deduct the interest paid on this loan from your assessable income. Take a look at this guide for details on individual tax exemption.
Does Hong Kong Tax Foreign Income Profit?
Thanks to the territorial tax system we mentioned earlier, The Inland Revenue Department (IRD) of Hong Kong, the official tax authority, applies an income tax exemption to money companies earn in foreign lands. However, thereâs one condition. Only incorporated companies with offshore activities are eligible. This rule means you canât claim a profit tax exemption if youâre an individual or unincorporated business. So, if your business falls into either of these categories and youâd like to claim profit deductions, company registration may be worth considering.
Eligibility for a Profit Tax Exemption
To be in the running for a profit tax exemption, youâll need to:
- Incorporate your company in Hong Kong
- Apply for offshore status
- Prove your profit source(s)
What Is an Incorporated Company With Offshore Activities?
The IRD has strict criteria for what counts as an incorporated company with offshore activities and how long a business can hold such a position. Letâs take a closer look:
What the IRD defines as an incorporated company: Your business needs to carry out its activities outside of Hong Kong, which includes not having the following in the region:
- Clients, customers, or suppliers
- Staff, service, or (a) physical office(s)
- Products (imported, produced, or sold)
- Web hosting
- Warehousing
- Directors who stay 60+ days per year
How long offshore status lasts: Once your company secures offshore status it can hold it for 3-5 years. You can renew your application after 3 years. Â However, to maintain the offshore status, youâll need to go through an annual audit to inform the IRD that your Hong Kong company is still offshore.
Which Profits Are Exempted From Taxation in Hong Kong?
So long you can prove your Hong Kong incorporated company has income accrued outside of the region and has active offshore status, itâs eligible for a tax exemption from the IRD.
I Want To Apply for a Profit Deduction. What Documents Will I Need?
If you wish to apply for a profit deduction on foreign income, itâs essential to think ahead and get organised. Keep accurate records on things like:
- The required documents for your companyâs annual financial statement audit
- Your companyâs tax exemption application
- Proof of transactions that show offshore activity, e.g., invoices, contracts, statements and receipts, customer correspondence, meeting minutes, phone records, shipping or sales documents, client particulars, and travel tickets
- Any other relevant financial documents
Top tip:
Donât rely on memory and manual tools to optimize your books. Let an intelligent bookkeeping software do the heavy lifting to stay on top of your numbers and paperwork easily.
Process & Timeline To Apply for Profit Tax Exemption
âTime flies,â as the saying goes. So, to ensure you can claim a profit tax exemption, it's essential to keep a close eye on the calendar. Letâs run through some processes to note and their corresponding deadlines, timelines, and duties:
Applying for the tax exemption status
Donât want to miss essential tax deadlines?
Check out our guide on tax filing dates in Hong Kong.
- Submit an application for offshore status 18 months after your first tax return as an incorporated company.
- To keep your offshore status (and tax relief), reapply every 12 months after your first successful application. Remember to disclose any changes to your company operations.
- File your profit tax return and provide an audit report to the IRD (give your auditor plenty of notice to prepare the documents).
- Your applicationâs success will depend on your company structure and the accuracy of your supporting document detailing profit source(s). Double-check these things before submitting.
- The IRD examines applications in detail, so itâs usually no shorter than 6 months before you receive their decision.
Requirements of the governing instrument
Setting up a charity in Hong Kong? You need to form it using a written governing instrument. In March 2023, the IRD brought in formal procedures for claiming tax-exempt status as a charitable body under Section 88 of the IRO.
The IRD has now clarified the process with an official application containing a checklist that outlines the process along with all the necessary information and documents youâll need.
There are 3 elements to include in your governing instrument:
- The charitable purpose category: State what role your charity is serving, e.g., public health or childrenâs education.
- The means of providing the charitable benefit: Declare the instrument for executing the charitable service, e.g., to make grants to schools.
- The eligible beneficiary group: Outline who the charity will serve, e.g., schools, children's hospitals, etc.
For more help writing on the governing instrument for charities, check out this guide from the IRD.
Duties of tax-exempt charities
While the charitable trust tax exemption has financial perks, it also comes with some legal responsibilities you must carry out to avoid penalties.
Submit accounts and annual reports. Keeping and sharing up-to-date books and annual reports with IRD are critical. The IRD occasionally checks to verify whether a charity qualifies for the exemption.
Inform the IRD of changes in circumstances. Things change, and as a tax-exempt charity, you need to give the IRD a heads-up when they do. In particular, notify the IRD within 1 month of the following developments:
- Change(s) to correspondence address
- Adjustment(s) to your charityâs governing instrument
- Termination of a subsidiary body, e.g., a service unit or time-limited project
- Ceasing operation, dissolution, or winding up of your charity
Declare chargeability to tax. If your charity stops its charitable efforts or starts earning profits outside of what the IRD exempts another reporting duty unlocks. Youâll need to let the IRD know in writing no later than 4 months after the end of the basis period for that assessment year.
Conclusion
Sure, taxes and their associated admin may not be the most fun tasks, but getting up to speed on tax exemptions can quite literally pay off whether youâre running as an individual or an incorporated company.
But youâll need to be prepared and organised to qualify, remain compliant, and keep your offshore status tax breaks. Track IRD-imposed requirements and submission dates and give your team enough time to execute them.
For best results, skip the learning curve and additional admin by letting a Hong Tax expert with the proper knowledge and equipment handle the process for you. Soon, youâll have a company reaping tax exemption rewards in Hong Kong.