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4 Things Make Hong Kong Lucrative for Russian Entrepreneurs

4 Questions to Proof Offshore-Sourced Income Tax Exemption Claim

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.

Income Tax eligibility in Hong Kong:

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.

  • Trading Income: Any profits that a Hong Kong company derives by concluding terms of purchasing and negotiating with suppliers and customers outside Hong Kong may be eligible to claim tax exemption as trading profits are derived outside Hong Kong.
  • Manufacturing Income: Another scenario where a Hong Kong company can claim a 50% exemption on profit is when a Hong Kong manufacturing company provides raw materials, management, training, technical services, and supervision to Mainland China labor after an agreement with Mainland China business entity.
  • Service Income: If a Hong Kong Company provides its services partly outside Hong Kong and partly in Hong Kong, it can claim the services it provides outside Hong Kong. Similarly, suppose a Hong Kong company appoints outside agents or gets services from services providers outside the Hong Kong premises. In that case, it raises the possibility of claiming tax exemption related to that services.

How do you survive the IRD test?

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:

  • Sufficient proof of profits derived outside the Hong Kong territory, backed by transactions, and details for such profits are provided.
  • The profits derived outside Hong Kong don’t involve any small or big business activity in Hong Kong.
  • Presence of any office, no office or physical premises, or daily business operations, activities, or decision making in Hong Kong premises.
  • Not more than 60 days of stay in Hong Kong by the Director in a tax year.

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.

Preparation and Documents Gathering for IRD Tax Return:

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.

  • Certified copies of all the statements, including financial, profit loss, account, and income statements.
  • Accounts audit report made by an auditor.
  • All the supporting statements and tax computation schedules give insights into how the profit is made.
  • The offshore tax exemption is not automatically initiated; one must apply for it while filing their 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:

  • Documentation and organization chart providing the location of offshore operations.
  • Official communication details, including emails, faxes, and telephone bills that show and provide a record of calls made to suppliers and clients.
  • Minutes of meetings and memos with potential customers and suppliers.
  • Traveling details, including passport copies depicting locations, visits, and travel dates.
  • Any logistics details, including purchase order, shipping documents, and sales order.

Is Offshore Tax Exemption Helpful?

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.

Conclusion:

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.