The Tax season is about to come; the tax exemption claim based on income not sourced in the Hong Kong Territory on a corporate income tax return (refer to as Profits Tax, tax return in Hong Kong Territory) is a relief for the overseas taxpayers in Hong Kong, especially where withholding income tax does not apply. Therefore sometimes, to their surprise, they have to pay both corporate and individual income tax collections in a short period of a few months.
Suppose you are an overseas entrepreneur having ownership of business vehicles, then you must take care of the following four things before applying for the offshore-sourced tax exemption. One important thing to consider is that Hong Kong is not A zero-tax jurisdiction, and tax evasion is illegal in Hong Kong; it must raise a red flag if someone is guiding you otherwise.
Before jumping into the details, first, answer whether or not the income is subjected to income tax.
The answer to this question is straight as the income tax laws in Hong Kong, which state that any profit is derived or arises from Hong Kong or inside the Hong Kong Territory is liable to profits tax.
It indicates that the profits derived by a Hong Kong, a limited company can be treated as offshore-sourced income and can be exempted from Hong Kong Taxation. Let’s explore a different example of business income described by IRD (Inland Revenue Department) to back up this statement.
The Inland Revenue department has its own rules and procedures to analyze tax exemption claims for an outside sourced offshore company. If any entity claims tax exemption, it must fulfill the following conditions:
It is advisable to get a professional assistant to file a claim for tax exemption; the IRD is very strict regarding invoices, receipts, bank statements, and any document involving financial transactions. Therefore all these documents are necessary, and professional advisory is helpful in this scenario. According to experts, a Hong Kong company must have an annual turnover of 1million HK$ to justify tax savings.
The claim for offshore tax exemption is submitted along with the other documents when filing for Profit Tax Return. The IRD issued a profit tax return to a Hong Kong company eighteen months after its incorporation date. Following documents are required to file the profit tax return.
A pro tip here is to request an Advance ruling when applying for tax exemption for an offshore operation to make your application process smooth; other than this, IRD also requires all the financial documents which show that all the transactions are made outside the Hong Kong, following are some necessary documents required by IRD:
The offshore tax exemption for Hong Kong companies may lessen your tax liabilities; it is helpful. A relief for businesses comes in the Hong Kong jurisdictions.
Still, offshore businesses are liable to other tax jurisdictions, and an exemption in one jurisdiction may increase the taxes in the other jurisdictions. Therefore it’s a double-edged sword; professional help regarding taxation can do wonders for your business.
Therefore if a business is located in jurisdictions where taxes are too much and laws are tight relative to Hong Kong, it’s better to take advantage of the Hong Kong Tax system by making all the transactions in Hong Kong and paying a flat income tax rate Hong Kong.
There is no Tax evasion in Hong Kong, it’s not a tax-free territory, but you can take advantage of offshore tax exemption by fulfilling all the requirements and providing necessary documents while filling out your annual tax return and applying for the exemption.
As per the Hong Kong tax laws, you can get full tax exemption on all the transactions made outside Hong Kong, but the company’s Director and other staff in Hong Kong are subjected to Salaries Tax; therefore, one way or another, you have to pay taxes. It is not possible to get 100% tax evasion in Hong Kong.