Hong Kong Offshore profits claim / tax exemption

Source of Income

In Hong Kong, offshore profits are generally exempted from Profits Tax. The broad guiding principle (i.e. “one looks to see what the taxpayer has done to earn the profits in question and where he has done it”) is applied for determining the source of income / profits.

The IRD has issued the Departmental Interpretation and Practice Notes No. 21 to provide guidelines on the determination of source of income / profits. There are some common types of tests, for example:

· Contract effected test (i.e. where the purchase and sales contracts are effected) is usually applied to trading transactions.

· Operation test (i.e. to identify the operations which produced the profits and where those operations took place) is usually applied to non-trading transactions.

· Provisional of credit test (i.e. where the money is first made available to the borrower) is usually applied to lending of money.

It is worth noting that the IRD usually requests for a substantial amount of information and documents to approve an offshore claim. It is important to ensure that the profits-generating activities are performed outside Hong Kong and sufficient documentation is kept to defend the challenge.

Partial offshore claim

A company may pursue partial offshore claim on its profits, if some of the profits are Hong Kong sourced, while offshore claim is available on non-Hong Kong sourced income / profits.

Foreign Source Income Exemption (FSIE) regime in Hong Kong

Effective from 1 January 2023, four type of offshore income (i.e., dividend income, interest income, disposal gains, intellectual property (IP) income) are subject to Foreign Source Income Exemption (FSIE) regime. Additional requirements have to be satisfied for tax exemption under Hong Kong Profits Tax even though the income / profit is offshore sourced.

Our Services

To assist our clients to pursue an offshore claim, we offer the following specialized services:

Offshore Review Report

Advance Ruling Application

Reply to the IRD’s enquiry letter

· Review the operations of the company

· Advise on the IRD’s view on how to determine the source of income / profits generated by the company

· Advise on how the transactions should be arranged in order to pursue an offshore claim

· Advise on how to prepare sufficient documentation to substantiate the offshore claim