Companies news
Fidinam: Onshore vs. offshore profits in Hong Kong
In its latest publication, Fidinam looks at determining whether your Hong Kong company is generating onshore or offshore profits, and what the subsequent tax consequences may be.
- Onshore Profits: If your company carries business in Hong Kong, all its profits are considered as onshore, and are hence subject to Hong Kong Profits Tax at the standard rate of 16.5%. Upon option, corporations can also enjoy a 2 tiers regime where:
- Up to 2M HKD, profits are taxed at 8.25%;
- Beyond 2M HKD, profits are taxed at 16.5%.
- Offshore Profits: If your company carries its business outside Hong Kong, and can demonstrate all activities generating offshore profits are carried overseas, it may report its profits as offshore and claim for a profits exemption (“Offshore Claim”).
Timing - Within its Profits Tax Return (“PTR”), the Company shall declare its profits as offshore (Part 10.1). The Inland Revenue Department (“IRD”) will acknowledge this Offshore Claim. 2 to 3 years later, the IRD will issue a Tax Enquiry Letter, asking the Company details and documents proving the activities carried outside Hong Kong.
Key Criteria - To determine whether or not the activities generating offshore profits are based in Hong Kong, the IRD adopts an “Operations Test”, aiming at answering the following questions:
- Where are the customers/clients/ suppliers established?
- How and where are contracts negotiated and concluded?
- How and where do the operations take place?
- (If trading), are goods entering Hong Kong?
- Does the company have staff working in Hong Kong?
- Does the company have premises in Hong Kong?
Supporting Documents: The success of any Offshore Claim rely on its supporting documents. It is paramount to produce, among others: sales and purchase invoices, order confirmations, Bank statements, Shipping documents, Travel expense documents and passport book copies . Memos of meeting with third parties.
Status: If the Offshore Claim is successful, and as long as the operations of the company do not change, the IRD will generally not challenge its offshore status for the next 2-3 years. Upon which a new Tax Enquiry Letter will be issued.
Offshore Claims need to be well documented and consistent with the audited accounts submitted to the IRD.
