Hong Kong is famous for its low tax rates and territorial taxation principle. In accordance with the territorial taxation principal, only profits arising in or derived from Hong Kong are chargeable to Profits Tax, currently at the rate of 16.5%. Profits derived from or sourced from other places outside Hong Kong are not taxable, or, free from profits tax.
Under the territorial taxation principle, it is possible and legal for your Hong Kong company to have its profits totally exempted from tax.
(1) Trading Profits
In determining the locality of profits derived from a Hong Kong business, the Hong Kong Inland Revenue Department (IRD? will look at what the taxpayer has done to earn the profits in question and where he has done it. If the contracts for purchase and sale are initially negotiated, concluded and subsequently executed outside Hong Kong, there are grounds to claim the trading profits so derived as offshore sourced and non-taxable.
(2) Service Income
If the services in question are physically performed outside Hong Kong, it is possible for your company to apply for tax exemption claim on the service fee income. The residence of principals and location of incidental activities performed before or after the income is earned are generally considered as irrelevant.
A successful claim must be supported by proper and sufficient documentations. It is our strategy to submit a full set of documentation for a typical transaction in support of the offshore claim when filing the company’s Profits Tax Return.
It is also worthwhile that you conduct a preliminary review to plan for the future formal submission and correspondences with the Inland Revenue Department (IRD, the tax authority in Hong Kong) at the start of an operation, or before undertaking a particular transaction. Our preliminary review service will provide our critical professional advice on the improvement of the documentation flow and the completeness of the company’s typical transaction. This can help the company to secure a greater chance of success with a minimum of correspondences with the IRD.