How Profit Tax Exemptions Work for Hong Kong Companies

As you’ve 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 business’ 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, we’ll dive into Hong Kong’s taxation system and unveil which profits can get tax relief if you’re operating as an individual or run an incorporated company. We’ll also break down Hong Kong’s eligibility requirements and how to apply for a tax exemption. Let’s dive in.

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, there’s no VAT, GST, withholding taxes, or interest. There’s also an estate tax exemption, personal loan tax exemption, and property tax exemptions for organisations.

Now, this isn’t to say the region is tax-free; you’ll 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 there’s no denying Hong Kong’s 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. Here’s a quick snapshot of Hong Kong’s current tax rates:

(Check out this Q&A for more info on the two-tiered tax rate).

The Hong Kong government doesn’t 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, there’s one condition. Only incorporated companies with offshore activities are eligible. This rule means you can’t claim a profit tax exemption if you’re an individual or unincorporated business. So, if your business falls into either of these categories and you’d 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, you’ll 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?

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, it’s 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, it’s essential to think ahead and get organised. Keep accurate records on things like:

• The required documents for your company’s annual financial statement audit
• Your company’s 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

Process & Timeline To Apply for Profit Tax Exemption

2 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 you’ll need.

There are 3 elements to include in your governing instrument:

1. The charitable purpose category: State what role your charity is serving, e.g., public health or children’s education.
2. The means of providing the charitable benefit: Declare the instrument for executing the charitable service, e.g., to make grants to schools.
3. 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.

3 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 charity’s 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. You’ll 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 you’re running as an individual or an incorporated company.

But you’ll 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, you’ll have a company reaping tax exemption rewards in Hong Kong.