The territorial principle is the fundamental to the taxation of profit tax in Hong Kong. Thus, the profits which arise in or are derived from Hong Kong are liable to profits tax. Otherwise, you can claim of tax exemption on the ground of “Income not sourced in Hong Kong”. That is, may be treated as offshore sourced and non-taxable in Hong Kong.
Does your company’s income liable to income tax in Hong Kong?
The profits derived by Hong Kong Limited Company may be treated as offshore sourced income and thus exempted from Hong Kong taxation. Here are some examples of various business incomes prepared by Inland Revenue Department (IRD):
Trading Profits
A Hong Kong company negotiates and concludes the terms of the purchase and sale contracts with suppliers and customers outside Hong Kong. And also carries out the relevant operations outside Hong Kong. Then it may be possible to claim that the trading profits so derived are non-taxable in Hong Kong.
Manufacturing Profits
A Hong Kong manufacturing business enters into a contract processing or assembly arrangement with a Mainland entity. And to entity located elsewhere where the arrangement is similar to the one with the Mainland entity. Moreover, the Hong Kong manufacturing business will provide the raw materials, technical know-how, management, training and supervision for the locally recruited labour and so on. Then it may be possible to claim that 50% of the manufacturing profits are not taxable in Hong Kong.
Service Profits
A Hong Kong company provides services partly in Hong Kong and partly outside Hong Kong. It may be possible to claim that part of the service income is attributable to the services rendered outside Hong Kong and therefore not taxable.
Furthermore, if a Hong Kong company appoints overseas agent or service provider to perform services on its behalf outside Hong Kong. It may be possible to claim that the entire service income relating to the services rendered outside Hong Kong is not taxable.
Can you get a green light from IRD?
IRD will examines each case of offshore-sourced income tax exemption claim. So, the samples above we have emphasized the word “possible”. IRD adopts operation test in the matter of facto to determine where the major business profit-making operation take place. That is, the source of profit. Usually, offshore-sourced income must at least fulfill all the following conditions:
- Sufficient Proof of profits not derived from Hong Kong.
- No business activities which produced the relevant profits held in Hong Kong
- No office (no physical office of daily business operation and decision making) in Hong Kong.
- The director(s) stay less than 60 days in Hong Kong during the financial year.
For further information, please contact us.
You may want to read: How to proof my income is offshore-sourced?