Following a number of recent enquiries on offshore taxation, we would like to repeat a series of blogs on the topic.
Many expats are saying they own an offshore Hong Kong Limited Company and they do not have to pay tax. Is that true?
First, we better talk about the basis of Taxation in Hong Kong
According to the Inland Revenue Ordinance (IRO) of Hong Kong, a company is subject to pay profits tax if,
– the company carries on a trade, profession or business in Hong Kong;
– the trade, profession or business derives profits; and
– the profits are derived from Hong Kong (i.e. the profits are sourced in Hong Kong).
Hong Kong adopts a territorial basis for taxing profits derived from a trade, profession, or business carried on in Hong Kong. In other words, a company who carries on a business in Hong Kong but derives profits from another place is not required to pay tax in Hong Kong on those profits. Profits tax is not applicable to profits whose source is outside Hong Kong.
Hence, the location of where a company’s activities take place is the key to whether a company’s profits are taxable in Hong Kong. If profits were earned from activities that take place entirely outside of Hong Kong, then these profits would not be taxable in Hong Kong even if the company’s transactions were carried out through the company’s Hong Kong bank account.