Offshore Claim Form: Save money with Hong Kong's corporate income tax exemption policy

Want your business to grow sustainably and maximize profits? Hong Kong’s foreign income tax exemption policy is the perfect solution. This article will help you better understand how this policy works, the benefits your business can reap, and what to keep in mind when applying it.

Do you want your company to develop sustainably and optimize profits? Are you looking for a foreign country with preferential tax policies and the best tax savings? Hong Kong's foreign income tax exemption policy is the solution for you. In this article, GLA will help you fully understand the conditions for enjoying the foreign income tax exemption policy in Hong Kong, specifically corporate income tax for Hong Kong companies.

1. What is corporate income tax exemption in Hong Kong?

Foreign income is simply any income you earn from outside Hong Kong. This includes:

• Dividend: Profit sharing you receive from investing in companies based abroad.
• Interest: Interest you receive from lending or depositing money in foreign banks.
• Royalties: Royalties you receive from using inventions, artwork, or other intellectual property in a foreign country.
• Profit from operations: Profits you earn from doing business abroad, such as selling goods or providing services.

Hong Kong adopts a territorial taxation policy. Under this policy, corporate income tax is only calculated on profits generated within Hong Kong territory.

For profits arising outside Hong Kong, a Hong Kong company can apply for an Offshore Claim Form to the Hong Kong government to declare its overseas business and tax residency status to prove that the source of profits is outside Hong Kong.  

2. What are the criteria for a Hong Kong company to be exempted from corporate income tax (CIT)?

A Hong Kong company will be eligible for CIT exemption if it conducts all of its business activities outside Hong Kong. Here are some examples of activities that qualify for CIT exemption:

• Hong Kong company has no customers or suppliers in Hong Kong.
• The owner of the Hong Kong company operates the business outside Hong Kong.
• Hong Kong company has no employees working in Hong Kong.
• Hong Kong Company does not provide services within Hong Kong territory.
• Hong Kong company does not trade products/services in Hong Kong.
• Day-to-day business decisions and service agreements are concluded outside Hong Kong.
• The owner or any overseas staff rarely visits Hong Kong.
• The company's products are not imported into Hong Kong.

3. What profits are tax-exempt in Hong Kong?

There is no provision for what type of profits will be exempt from tax. As long as it can be demonstrated that all of the Hong Kong company's business activities are conducted outside Hong Kong, the Hong Kong company's profits will be exempt from corporate income tax in Hong Kong.

Normally, if a Hong Kong company does not generate revenue or expenses in Hong Kong, it will be eligible for corporate income tax exemption in Hong Kong. But if half of the Hong Kong company's income is generated outside Hong Kong and half is generated in Hong Kong, will the Hong Kong company be fully exempted from tax?

In certain cases where half of the company's business is located in Hong Kong and the other half is located outside Hong Kong, Hong Kong companies can split their taxable profits 50:50. And Hong Kong companies can still get partial tax exemptions but will need to go through a more rigorous process with close GLA consultation and Hong Kong audit.

If you want to compare Hong Kong corporate tax rates with other countries, check out: International Corporate Income Tax Comparison Tool.

4. What should a Hong Kong company prepare to be exempt from corporate income tax?

In addition to the financial statements required for the Hong Kong company's annual audit, the Hong Kong company should consider keeping any financial documents or transactions that illustrate the company's overseas business activities. These could be:

• Invoice, contract.
• Customer statements and receipts or correspondence.
• Or it could be meeting minutes.
• Phone records, shipping/sales documents, etc.
• The above documents can support the entire tax exemption review and year-end audit process for Hong Kong companies to go smoothly.

5. When is the time to apply for corporate income tax exemption for Hong Kong companies?

• For first time application for corporate income tax exemption for Hong Kong company: The company should submit the application within 18 months from the date of filing the first corporate income tax return. The tax exemption application will be processed smoothly once the Hong Kong company can prepare all the necessary documents for the Inland Revenue Department of Hong Kong (IRD).
• For subsequent CIT exemption applications for Hong Kong companies: Every 12 months after receiving the official notice of corporate income tax exemption.

6. How long does the whole process of reviewing the application for corporate income tax exemption for a Hong Kong company take?

The process of reviewing this CIT exemption application will take several months, as the IRD will review the details before making a final decision. In addition, the processing timeframe will depend on the Hong Kong company structure.

• First, IRD will examine the documents submitted by Hong Kong companies, including audited financial statements.
• The Hong Kong government's Audit and Investigation Department will then step in to conduct further checks.
• Finally, after completing the review process, IRD will send the Hong Kong company a formal CIT exemption notice, if the company's documents and explanations convince IRD that the company should be exempted from tax.

7. What will GLA do to assist Hong Kong companies in declaring foreign tax residency status to the Hong Kong government?

With experience in supporting and consulting many Hong Kong companies in preparing financial reports, auditing reports, and filing for corporate income tax exemption, GLA will:

• Assist Hong Kong companies in preparing monthly accounting reports, in case Hong Kong companies have no experience in preparing them.
• Review of internally prepared financial statements in accordance with Hong Kong accounting standards. (In case the company has not prepared internal statements - GLA will provide an additional internal financial statement preparation service package - the cost depends on the number of transactions of the company in the fiscal year).
• Support Hong Kong companies in preparing documents - invoices - vouchers for auditing (This is a mandatory requirement when Hong Kong companies need to do auditing even though they are not profitable).
• Advise on the types of financial documents that Hong Kong businesses need to prepare for a smooth tax exemption application process.
• Monitor and update progress until the entire corporate income tax exemption application review process is completed.

8. Frequently asked questions when Hong Kong company completes Offshore Claim Form

Highlights

• Hong Kong companies generating revenue outside Hong Kong will enjoy corporate income tax exemption. 
• The Offshore Claim Form is a request to the Hong Kong Inland Revenue Department (IRD) for an exemption from Hong Kong corporate income tax for a company that generates qualifying income outside Hong Kong. 
• Hong Kong companies need to renew their Offshore Claim Form annually and the application process can take several months. 
• If you are interested in Hong Kong corporate taxes, please refer to: Types of taxes that Hong Kong companies need to pay.