Introduction on Taxation of Hong Kong Companies Operating Offshore

Hong Kong is an international metropolis city in Asia and has a port for international trade. Hong Kong has an excellent legal foundation, strict law, and a strict judicial justice that is trusted by the world.

Hong Kong becomes an international commercial, trade, and financial pivot, not limited to the above-mentioned reasons. They have a great transportation facility for sea, land, and air, the international circulation network, diversified financial and bank service, etc. Besides, the cost of operating a business and setting up a company in Hong Kong is low, and the procedures are simple and convenient. People from all over the world (including natural persons and legal persons) can register a company in Hong Kong, in order to develop and operate international businesses in Hong Kong.

1. Hong Kong’s Tax System

The tax system in Hong Kong is simple, and the tax rate is low. Hong Kong adopts a territorial basis for the income derived from a trade, profession, or business conducts in Hong Kong. Income tax is taxed on profits derived in Hong Kong. In short, the company registered in Hong Kong, but their incomes are derived outside of Hong Kong, they will need not pay for the income tax.

The Hong Kong tax is beneficial for any foreigners (natural person or legal person) to register a company in Hong Kong and conduct international trade and commercial activities by offshore. The income from offshore operations need not pay for Hong Kong profit tax.

There is no restriction for offshore operation, the Hong Kong Inland Revenue Department will still review the application of the offshore tax exemption to prevent tax evasion.

2. Conditions for applying offshore income tax exemption

According to the inductive analysis of the Hong Kong tax laws, Hong Kong Inland Revenue Department and the historical cases of the courts, Hong Kong companies applying for offshore income tax exemption shall meet the following conditions: –

(1) The company does not have any office, business premises or business conducts in Hong Kong (excluding registered address);
(2) The actual management including the board of directors are based outside Hong Kong;
(3) The business activities are conducted outside of Hong Kong;
(4) The company business is negotiated and executed outside of Hong Kong and the sales and purchase documents are prepared outside of Hong Kong;
(5) The company does not have a warehouse in Hong Kong to store the company’s products;
(6) The company does not employ any staff or engage any agent to carry out any business activities or conduct business in Hong Kong.

If the company business modal meets the conditions above, the company could consider applying for offshore income tax exemption. Under the offshore operation mode, even the company has business transactions with Hong Kong suppliers and customers, as long as the transactions are not negotiated and signed within Hong Kong, and the transactions go through letters or email overseas, then the transactions income will not affect the company to apply for offshore income tax exemption.

3. Avoidance of double taxation agreements between Hong Kong and other tax jurisdictions

In recent years, Hong Kong has entered into Comprehensive Double Taxation Agreements / Arrangement (DTAs) with several jurisdictions. DTAs can reduce or eliminate double taxation caused by overlapping tax jurisdictions rights on natural persons or corporate legal persons from different tax jurisdictions.

Currently, countries that have signed DTAs with Hong Kong include Mainland China, Belgium, Luxembourg, Thailand and Vietnam. Hong Kong is also currently negotiating agreements with several countries, including Cambodia, Cyprus, Germany and Norway.

Companies need to pay attention to these two Articles in the DTAs, there are “Permanent Establishment” and “Exchange of Information”. First, companies need to be aware of the definition of a permanent establishment in the relevant Article, because if an enterprise of a contracting party carries on business in the other contracting party through a permanent establishment situated therein, its profits may be taxed in the other contracting party, but the profit is attributable to the permanent establishment. The term of the Exchange of Information indicates that the competent authorities of both contracting parties shall exchange such information as is necessary for carrying out the provisions of the DTAs or with the respective internal laws of both contracting parties involved in the taxation of the double taxation agreement, it will be taxed based on the avoidance of double taxation agreement and not conflict with the legal limit.