In Hong Kong, your incorporated company can be exempted from profit tax if the profits are derived from outside of Hong Kong. In this article, we’ll unpack all you need to know about applying for an exemption to benefit your Hong Kong business. You can read through the article to understand more but if you need an experienced accountant in Hong Kong to offload the task of calculating your profit tax for you, drop us a chat.
What is Hong Kong Profit Tax & How Much Do I Pay?
Does Hong Kong Tax Foreign Income?
Is my Company Eligible for a Profit Tax Deduction?
What’s an Incorporated Company with Offshore Activities?
Which Profits Are Exempted from Taxation in Hong Kong?
What Documents Will I Need?
Apply for Profit Tax Deductions: Process & Timings
Taxation in Hong Kong
Before we dive into the process of profit tax exemptions in Hong Kong, let’s talk taxation in general. There are no capital gains tax, no VAT/GST, no estate duty, and no withholding tax on dividends or interest in Hong Kong. The region is not entirely tax-free but it’s no surprise it’s reputed as being accessible and business-friendly, considering it boasts:
- Territorial tax system
- Simple tax structures
- Low tax rate
- No restrictions on company incorporation
- Tax incentives
- Profit tax exemptions
What’s a territorial tax system?
Only income earned within Hong Kong is subject to profit tax. This principle applies to both residents and non-residents, which means it could also apply to you.
What is Hong Kong profit tax & how much do I pay?
Any local profit that arises from a business or trade in Hong Kong is liable for profit tax, payable to the Inland Revenue Ordinance (IRO) of Hong Kong. In 2018, the tax rate for the first year of assessment was lowered to help reduce the taxpaying burdens for SMEs. Here’s more info on the two-tiered tax rate.
|Tax Rate||Two-tiered tax rate applied||Two-tiered tax rate not applied|
|Assessable profits under HK$ 2,000,000||8.25%||16.5%|
|Assessable profits above HK$2,000,000||16.5%|
Does Hong Kong tax foreign income?
No. Only locally-sourced profits are taxable due to the territorial tax system. So if your company’s income is generated outside of Hong Kong, you could apply for an exemption. We offer accounting services to set you up for success.
Is my company eligible for a profit tax deduction?
The Inland Revenue Department (IRD) of Hong Kong Profit, the official tax authority will ultimately grant the tax exemption. Only incorporated companies with offshore activities are eligible for profit tax exemptions, so you’ll need to claim for offshore status and prove the source of your profits.
What’s an incorporated company with offshore activities?
Companies with offshore status carry out all of their business activities outside the region. For example, they have none of the following in Hong Kong:
● No clients, customers or suppliers
● No services, staff or physical office
● No products (entering, made or trading)
● No web hosting
● No warehousing or physical office
● No directors who stay 60+ days per year
How long does offshore status last?
Your company can maintain an offshore status between 3 to 5 years. You can start renewing after 3 years. However, you will need to go through an annual audit to declare to the Inland Revenue Department that your company in Hong Kong is still an offshore one.
Which profits are exempted from taxation in Hong Kong?
Prove that all of your business activity happens outside of Hong Kong and your profits will be tax-free.
Also, if a portion of your profit comes from outside Hong Kong you’re still able to get partial tax exemption but will need to undergo a bit more of a stringent process with close consultation with your Certified Public Accountant. Of course, it’s dependent on the arrangements of your operations, services rendered and contracts but it could apply to: Service Income, Manufacturing Profits or Trading Profits.
I want to apply for a profit deduction. What documents will I need?
Along with what’s required for your annual financial statement audit and the application itself, consider keeping any other relevant financial documents or proof transactions that illustrate offshore activity. These could be invoices, contracts, statements and receipts or customer correspondence. It could also be meeting minutes, phone records, shipping or sales documents and even client particulars and travel tickets. With our smart bookkeeping software, it’s easy to stay on top of it all.
Process & timeline to apply for Profit Tax Exemption
● When to first apply for offshore status?
18 months after filing your very first profit tax return as an incorporated company.
● When to reapply for offshore status?
Every 12 months after your first application was granted, with an obligation to disclose any key company changes.
● What to submit?
File your profit tax return along with an audit report (make sure your auditor knows you’re applying ahead of time).
● What are the success factors based on?
Your company structure and extent of correct documentation to support the source of your profit.
● How long does it take?
The IRD needs time to go over all the documents supplied and inspect them in detail so it’s usually no shorter than 6 months
Sure, the rules and regulations of profit tax exemptions in Hong Kong may seem a little complex but we’re here to make it simple and put you in the best position for a successful application.