Offshore Exemption

The offshore exemption refers to the agreement by the Hong Kong Inland Revenue Department that the profits generated by a Hong Kong company are considered offshore income. According to Hong Kong tax laws, the offshore income of a Hong Kong limited company is exempt from profits tax, meaning that "business operations not conducted locally, and profits derived from overseas" can apply for government exemption from profits tax.

This is primarily because Hong Kong's taxation of profits adheres to the territorial source principle, which means that only profits sourced in Hong Kong are taxable. If the profits are not sourced from Hong Kong, a company can declare during tax filing that it operates offshore. Whether the profits are sourced from Hong Kong is determined by the nature of the profits or the nature of the transactions generating the profits.

Conditions for Applying for Offshore Exemption for Hong Kong Companies

1.No customs declaration or receipt and delivery of goods occurred in Hong Kong;

2.The company does not have a physical office or employ Hong Kong staff;

3.Suppliers and customers are not Hong Kong-based businesses;

4.The signing process for offshore exemption orders is not conducted in Hong Kong;

5.The company has no operational records or similar documents held with the Hong Kong government.

If a company meets all the above conditions, it can submit the necessary documentation to the tax authority to apply for offshore exemption.

Application Materials for Offshore Exemption

The documents for applying for offshore exemption for a Hong Kong company include (but are not limited to) the following:

1.Organizational structure of the Hong Kong company.

2.Company's products and pricing, preferably organized into a price list.

3.Information on whether the company has a warehouse, including location.

4.Details of all employees responsible for business operations, including locations of business trips, contract signing locations, etc.

5.Detailed information about customers and suppliers (including company names and addresses).

6.Information about suppliers, including the basis for product pricing; supplier delivery channels, and payment channels (if using a letter of credit, also provide letter of credit information).

7.Customer sourcing channels and basis for product pricing; delivery channels and customer payment methods (if using a letter of credit, also provide letter of credit information).

8.All purchase and sales contracts, invoices, insurance, transport documents, and business-related correspondence (including faxes and emails) of the company.

Process for Applying for Offshore Exemption for a Hong Kong Company

-The company conducts an audit and submits the audited financial statements and reports to the tax authority.

-The tax authority issues a letter concerning offshore issues.

-The company drafts and submits a reply letter along with the relevant documents to the tax authority.

-The tax authority reviews and issues the approval results.

Important Notes

Once a Hong Kong company's application for offshore exemption is approved in its first year, provided there is no change in the company's operational model, the tax authority generally will not conduct another review for 2 to 3 years. After this period, the tax authority may periodically request the company to resubmit documents, but the final requirements are determined by the tax authority.

Offshore Exemption

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