A Hong Kong-based company can be legally formed without a physical presence, allowing for remote operations with no physical office or on-site staff. If the company generates all of its income from sources outside Hong Kong, it will not be subject to taxation within the region.
Consider the following distinctions between offshore and onshore companies in Hong Kong for better comprehension:
Offshore and onshore companies’ comparison table
Comply with legal requirements by filing audited financial statements and holding annual general meetings.
Obliged to submit audited financial statements and conduct annual general meetings following the Hong Kong law.
Enjoy tax exemptions through offshore claims.
Only a few tax exemptions are available;
No taxes are imposed on profits, capital gains, or overseas dividends.
Subject to a 16.5 percent corporate tax on overseas profits, capital gains, and dividends.
Prohibited from engaging in trade with Hong Kong customers or conducting business within Hong Kong.
Allowed to conduct business with Hong Kong customers and operate within Hong Kong.
Offshore companies offer enhanced flexibility and substantial cost savings, thanks to their more relaxed regulations and reduced operational expenses.
Conversely, onshore companies enjoy heightened legitimacy in the eyes of Hong Kong authorities and seamless access to the local market. The choice between opting for an offshore or onshore company fundamentally depends on a business owner's specific requirements and the objectives they aspire to accomplish.
Typically, two widely used tests are used to ascertain a company's offshore status to determine whether the company will be subject to taxation within the region. The following tests are:
Contract effected test
The contract effected test is used for determining the taxability of the income accruing to the taxpayer from trading transactions. The critical factor is whether the purchase or sale contract is made in Hong Kong. It includes negotiation, conclusion, and execution of the contract terms. The following factors should also be taken into consideration:
- How were the goods shipped?
- How were the sales solicited and orders processed?
- How were the goods procured and stored?
- How was financing arranged?
- How was the payment made?
The operations test pertains to scenarios beyond trading and money lending, encompassing sources like manufacturing income and passive earnings. When seeking tax exemptions for commission income, it's essential to address the following inquiries:
- What is the primary source of income?
- Did this source originate within Hong Kong?
- What activities were undertaken to generate profits, and where were they conducted?
In the context of obtaining offshore status, it is crucial for businesses to take into consideration the following prerequisites:
- Absence of a physical, operational presence in Hong Kong.
- Absence of locally hired staff working in Hong Kong.
- Lack of customers or clients originating from Hong Kong.
- Absence of suppliers based in Hong Kong.
- Negotiation and finalization of sales and purchase contracts occurring outside of Hong Kong.
- Non-importation of goods into Hong Kong.
- Ensure that service agreements or sales/purchase invoices do not involve any parties located in Hong Kong.
- The core business activities must occur outside of Hong Kong.
Once these fundamental conditions are met, the tax authority will review the supporting documentation to determine the company's tax liability. It is important to note that after obtaining the exemption, the company is still required to maintain annual accounting and audit reports and file tax returns in its jurisdictions outside of Hong Kong.
Documentary pieces of evidence including, but not limited to, the following documents, are critical to the success of the claim:
- Organizational Chart: Provide a detailed organizational chart outlining your company's presence in Hong Kong and overseas. This chart should include the office locations, sizes, number of employees, names, job titles, responsibilities, and compensation packages.
- Travel Itinerary and Passports: The travel schedules and passport information for the directors and individuals involved in the Hong Kong company's operations.
- Business Activities Description: Specify the responsible person and where these activities were conducted for each identified activity to substantiate the income generation and describe the company's operational activities.
- High-Income Documentation: For high-income segments, it's essential to provide the following documents:
- Communication Records: Include all correspondence related to negotiations with customers and suppliers, encompassing emails, faxes, and similar documentation.
- Agreements: Share any distribution agreements or master sales agreements, if applicable.
- Transaction Records: Include purchase and sales orders, confirmations, shipping documents, and sales and purchase invoices.
- Banking Records: Submit any pertinent banking documents that support income claims.
Annual compliance requirements for an offshore company
Business registration renewal
Stay compliant by renewing the Business Registration Certificate annually or triennially, ensuring it's renewed at least one and a half months before expiration.
Store your company's accounting records at the registered office for at least seven years after each fiscal year, ensuring ongoing adherence to regulatory requirements to maintain compliance and streamline audits.
Maintain 10-year records of entity details, past members, meetings, and single-member decisions at your registered office.
Profit tax return
Companies formed under Cap 622 must submit their profit tax returns to the IRD, including supplementary forms if necessary, within one month of the issue date and pay the tax within one month of the filing deadline unless exempted.
Every business must submit an annual return to the Companies Registry within 42 days of its formation anniversary, signed by an authorized representative.