In short
- Profits tax reaches only profit arising in Hong Kong, whatever the residence of the company or its owner.
- The Department asks what the company did to earn each profit and where, deal by deal.
- The claim goes into form BIR51 with a statement of reasons the company can prove on request.
- On HK$3,000,000 of profit the tax is HK$330,000 without a claim and nil with a claim accepted in full.
In this guide
Hong Kong offshore company: what the territorial rule taxes
"Offshore company" is a word of the market. The law knows a Hong Kong private company limited by shares and taxes its profits "arising in or derived from Hong Kong"; the Department's practice note calls the rest offshore profits. Offshore is the status of a year's profit, decided return by return, and one company can hold both kinds.
Section 14 of the Inland Revenue Ordinance charges profits tax where three conditions meet:
- The company carries on a trade, profession or business in Hong Kong.
- The profit comes from that business.
- The profit arises in or is derived from Hong Kong.
This guide is about the third condition, and the residence of the company or its owner plays no part in it. Profit that arises abroad stays out of the charge even when it is paid into a Hong Kong bank account. Profit that arises in Hong Kong pays the two-tiered rates of Schedule 8B, in force since 2018/19: 8.25% on the first HK$2,000,000 and 16.5% on the rest.
The operations test: what the company did to earn the profit, and where
The Inland Revenue Department sets out its practice in Departmental Interpretation and Practice Notes No. 21, Locality of Profits, revised in July 2012. Its test comes from the courts: what operations produced the profit, and where they took place. The note applies these principles:
- Each transaction is looked at on its own, by the gross profit it earned.
- Only the operations that produce the profit count. A first business contact or a decision taken at a meeting does not move the source.
- The operations must be the company's own, or done for it by an agent on its instructions. The work of another company of the group does not count.
- A company whose principal place of business is Hong Kong earns untaxed profit only in rare cases, in the words of the Privy Council the note quotes.
Renting an office and hiring general staff in Hong Kong do not by themselves place the profit there, while profit from sales and services to customers in Hong Kong generally stays taxable. A company run from abroad, with its registered office and secretary in Hong Kong, is judged by where its people negotiate, sign and perform each deal.
Hong Kong territorial tax by kind of income
DIPN 21 gives a starting point for each kind of income, and the Department weighs the facts of each case against it.
| Income | Where the profit arises | What shows it |
|---|---|---|
| Trading in goods | Where the contracts of purchase and sale are solicited, negotiated, concluded and performed | Contracts, order correspondence, travel records of whoever made each deal |
| Services | Where the staff perform them; split when partly in Hong Kong | Timesheets, where the staff worked, travel records |
| Sale or purchase commission | Where the agent itself works | Agency agreement, records of meetings and trips |
| Royalties for rights used outside Hong Kong | Where the licence was acquired and granted; rights used in Hong Kong are taxed by section 15 | Licence agreements and where they were signed |
| Interest, outside financial institutions | Where the credit was provided to the borrower (DIPN 13) | Loan agreement, where the funds were advanced |
| Listed shares | The exchange where the shares trade | Broker contract notes |
| Manufacturing | Where the goods are made; contract processing outside Hong Kong usually split 50:50 | Processing agreement, factory records |
Trading profit: the Department's presumptions
- Purchase and sale both effected outside Hong Kong: no part of the profit is taxable.
- Both in Hong Kong: taxable in full.
- One of the two in Hong Kong: presumed taxable in full until the other operations show otherwise.
- A sale to a customer in Hong Kong, or a purchase from a Hong Kong supplier, usually counts as effected in Hong Kong.
- Contracts made from Hong Kong by telephone or e-mail, with no travel, count as effected there.
A trading profit is taxed in full or not at all. Service fees and manufacturing profit can be split between Hong Kong and abroad on a basis the company puts forward.
How to make an offshore claim in the profits tax return
There is no separate application. The claim stands in the profits tax return, form BIR51, filed with the audited financial statements and the tax computation:
- Sort the year's income, deal by deal, into profit that arose in Hong Kong and profit claimed to arise abroad.
- Scale down the general expenses that served both kinds and explain the basis in the computation; the Department usually expects a split by gross profit.
- State the net offshore profits in item 10.1 of the return.
- Attach a statement of the reasons for the claim, capable of proof by evidence when the Department asks.
- Keep the records, with the invoices, vouchers and bank statements behind them, for 7 years after each transaction (section 51C).
- Answer the Assessor's enquiry: section 51(4) allows a request for full information on any transaction.
The claim ends in a notice of assessment. A company that disagrees objects in writing, with its grounds, within 1 month of the notice (section 64), and on appeal it carries the burden of proof (section 68(4)). An assessor can raise an additional assessment within 6 years after the year of assessment, or 10 years where fraud or wilful evasion caused the shortfall (section 60).
We prepare the return, the statement of reasons and the schedule of offshore profit with accounting in Hong Kong, from the same books.
Before the deals, the Commissioner can give an advance ruling on whether profits arise in Hong Kong (section 88A). The application fee is HK$45,000, plus hourly fees when the work runs past the time Schedule 10 sets.
We do this for you Hong Kong company formation in 1 to 4 working days
What the Assessor asks, and what weakens an offshore claim
For a trading company the note lists what the Department asks: how the goods were procured and the sales solicited, and how the orders were processed and the goods shipped. It asks too how financing and payment were arranged. Where staff travelled to make the deals, the Assessor asks for the travel, hotel and subsistence expenses of each one; where agents abroad made them, for the agency agreements.
What makes a claim weak
- The people who negotiate and conclude the deals sit in Hong Kong, or deal from there by e-mail.
- The customers or the suppliers are in Hong Kong.
- The claim rests on the work of a related company abroad that did not act for the company.
- Profit from work done in Hong Kong is booked as earned abroad: the Department applies the anti-avoidance provisions and penalises blatant non-disclosure.
An incorrect return can draw additional tax of up to three times the tax undercharged (section 82A).
Worked example: HK$3,000,000 of profit with and without the claim
A company has an assessable profit of HK$3,000,000 for the year and no connected entity. Without a claim the tax is 8.25% of HK$2,000,000 plus 16.5% of HK$1,000,000: HK$165,000 + HK$165,000 = HK$330,000. The formula for any profit: 8.25% of the part up to HK$2,000,000 plus 16.5% of the part above it.
| Case | Profit taxed in Hong Kong | Profits tax |
|---|---|---|
| No claim, or the claim refused | HK$3,000,000 | HK$330,000 |
| Claim accepted in full | HK$0 | HK$0 |
| Services, 60% of the profit accepted as earned abroad | HK$1,200,000 | HK$99,000 |
| Trading, the sale contracts effected in Hong Kong | HK$3,000,000 | HK$330,000 |
| No claim, and a connected entity takes the lower tier | HK$3,000,000 | HK$495,000 |
Only one entity of a group of connected entities can take the 8.25% tier in a year, by electing in its return. The others pay 16.5% on the whole profit, here HK$495,000.
The final tax for 2024/25 is reduced by 100% up to HK$1,500 a business, and for 2025/26 up to HK$3,000. On the first row that gives HK$328,500 for 2024/25 and HK$327,000 for 2025/26. Provisional tax is paid in full all the same.
Foreign dividends, interest and gains: the FSIE regime in Hong Kong
Since 1 January 2023 some foreign income is taxed when it reaches Hong Kong. Under section 15I, specified foreign-sourced income that an MNE entity, a member of a multinational group, receives in Hong Kong counts as arising there. It covers interest, dividends, income from intellectual property and gains on shares, and from 1 January 2024 gains on any other property.
A multinational group has at least one entity or permanent establishment outside the jurisdiction of its ultimate parent, whatever its size. The definition counts legal entities only, so a company owned by a founder that holds no company or branch abroad forms no such group. Trading and service profit stays under the operations test.
The income stays out of the charge under one of three exceptions:
- Economic substance, for interest, dividends and most disposal gains: the company carries out or arranges in Hong Kong the work that earns the income, with staff and spending the Commissioner finds adequate.
- Participation, for dividends and gains on shares: a holding of 5% or more kept for 12 months or more, where the income or the profit behind it bore a similar tax abroad.
- Nexus, for income from intellectual property: the part that matches the company's own qualifying research and development.
A company chargeable on such income with no return issued tells the Commissioner in writing within 4 months after the end of the basis period (section 15J).
Hong Kong dividend tax and withholding tax
Hong Kong withholds no tax from dividends or interest. A dividend paid by a company chargeable to profits tax is not counted again in the profits of a shareholder taxed in Hong Kong (section 26). Any tax on it belongs to the place where the owner lives.
Royalties are the exception. A Hong Kong company may pay a non-resident for the use in Hong Kong of a patent, trade mark, copyright or similar right. Then 30% of the sum counts as taxable profit (section 21A), and at 16.5% the tax is 4.95% of the royalty. For an associate 100% counts, unless no business in Hong Kong has ever owned the right. The tax is charged in the name of the Hong Kong payer (section 20B).
We register the company with its secretary and registered office through company formation in Hong Kong and keep its books ready for the claim from the first deal. Its yearly filing to the Companies Registry is in our guide to the annual return NAR1.
