There is a territorial principle of charging income tax in Hong Kong, which means that Hong Kong is not an offshore zone as many clients think. If a company is doing business in Hong Kong, it must pay income tax of 8.25% on the first 2 million HKD profits and 16.5% on any profit above that amount.
If the company has no activities at all in Hong Kong, it is exempt from paying income tax. Some other taxes include payments to the pension fund in the amount of 5% of the salaries of local employees. But if there are no such workers, a company doesn’t have to pay that tax.
If the company has no business activities in the territory of Hong Kong, it can request an exemption from payment of income tax after a special procedure.
The requirements for that include:
· Have no office or staff in Hong Kong,
· Director must be permanently located out of Hong Kong,
· Have no contracts with HK companies or signed in Hong Kong,
· Not to make any mutual settlements with residents of Hong Kong.
The tax-exempt process begins with an application to the IRD along with the audit report, in which the company, on the basis of its actual operations, requests an opportunity for tax-exempt status for a specified reporting period.
For successful obtaining offshore status it’s necessary to provide all invoices, contracts, shipping documents, confirming that the company has conducted activities outside of Hong Kong. In addition, the IRD may request confirmation that the company doesn’t have staff in Hong Kong, and the director was not in Hong Kong, or made only short visits (a report from the Immigration Department must be provided).
Unfortunately, obtaining tax-exempt status is not a one-time procedure. However, in case of successful obtaining the offshore status the next request for the preparation of profit tax return according to the usual practice will come from IRD not in a year after the first request (the first PTR), but in 3 years, and the company will need to report for three years at once, too.
The reasons for the absence of tax to be paid can be different: the company did not start operations, the company made a loss, the company requested a zero rate of income tax.
If the company, all its customers and suppliers operate outside of Hong Kong, and such a company has all the supporting documents, the chance of obtaining offshore status is very high. But in any case, the final decision always rests with IRD. The offshore status must be reconfirmed every seven years approximately. If a company has changed the type of activity, for example, from trade to services, then the IRD will send a request immediately upon such a change.
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