Introduction to Profits Tax in Hong Kong

If you’re considering setting up a company in Hong Kong and want to understand the taxation system, this article will help explain profits tax in Hong Kong and how companies may qualify for profits tax exemptions.

How are Profits Taxed in Hong Kong?

Hong Kong is renowned for its simple, low-tax regime, making it one of the most business-friendly jurisdictions globally. Adopting a territorial tax system, Hong Kong only taxes profits derived from local trade, profession, or business activities.

The structure of profits tax in Hong Kong is as follows:

• 8.25% on the first HKD 2 million of profits
• 16.5% on profits above HKD 2 million

Importantly, offshore profits — those generated from outside Hong Kong — are not taxable (subject to separate application). This means that a business operating in Hong Kong but earning profits from foreign sources is exempt from Hong Kong profits tax on those offshore earnings.

Eligibility for Profits Tax Exemption in Hong Kong

To qualify for offshore tax exemption in Hong Kong, a company must demonstrate that:

• Its principal place of business and day-to-day business decisions are made outside of Hong Kong.
• It has no physical office or operations in Hong Kong.
• It does not store stock, conduct sales, or deal with Hong Kong-based customers or suppliers.

While companies cannot have any physical presence in Hong Kong to qualify, a virtual office for mail receiving does not impact offshore status.

How to Apply for Profits Tax Exemption in Hong Kong

Applications for profits tax exemption should be filed alongside the company’s annual profits tax return. For newly incorporated companies, the first profits tax return will be due approximately 18 months after the incorporation date. From there, you will have three months to file the return with the company’s audit report.

Preparing for the Exemption Application

Inform your auditor in advance if you intend to apply for profits tax exemption. The auditor will prepare the company’s accounts, tax computation, and profits tax return to reflect that the profits are not subject to Hong Kong profits tax.

When the Inland Revenue Department (IRD) receives your application, they will begin their review by issuing an initial batch of questions several months, or even a year, after submission. To support the application, you will need to provide documentation such as contracts, email correspondence, and directors’ travel records. It is crucial to keep all records organized, as the process can be time-consuming.

Exemption Application Timeline and Costs

The back-and-forth communication with the IRD may span several years. Even after granting offshore status, the IRD will periodically follow up with additional questions to ensure the company still qualifies as an offshore entity.

Additionally, you may choose to work with a tax advisor to help ensure responses to the IRD are accurate and avoid complications, although this will incur extra costs and can be costly. Ultimately, it’s up to the company to weigh whether applying for offshore tax exemption is worthwhile.

Want to Learn More About Hong Kong Taxes?

Check out our other tax related posts here or visit our website to explore more and discover how our team can assist with Hong Kong tax requirements.