Hong Kong Tax – Application for Exemption from Tax

Hong Kong offers good opportunity for offshore arrangements. The territorial concept of its taxation system renders only those profits which arise in or are derived from Hong Kong are subject to tax. The residence or citizenship of a taxpayer is not relevant at all.

The tax law states clearly that only profits arising in or derived from Hong Kong are chargeable to profits tax. It is well established law that the following three conditions must be satisfied before a profits tax liability arises in Hong Kong:

  1. The person must carry on a trade, profession or business in Hong Kong;
  2. The profits to be charged must be from such trade, profession or business carried on by the person in Hong Kong; and
  3. The profits must be profits arising in or derived from Hong Kong.

In most cases involving offshore arrangements, conditions (a) and (b) are easily satisfied. For condition (c), the broad guiding principle is that one looks to see what the taxpayer has done to earn the profits in question and where he has done it. There are also established guidelines to assist in locating the source of profits.

In some cases, business profit can arise partly in Hong Kong and partly elsewhere. It is required to determinate how much of the profit arose in Hong Kong, if possible, on a rational basis considering all the available facts and circumstances of the particular case. Where it is not possible to do so, the profit may be viewed as arising either wholly in or wholly outside Hong Kong subject to the most important elements of the source of the profit were located.

There are two usual ways to lodge an offshore claim:

  • making an application of Advance Ruling before you put all your operation in placed; or
  • lodging Offshore Claim when filing your tax return if your business had been in operation.

There are pros and cons for each of the methods. Consult a tax professional who could understand your business operation before choosing the appropriate way to proceed your case.