Offshore Claim Part 1 (1/2)
Welcome to Our Trading Profits Offshore Claim Series Part 1. In this 2-part Series, we will talk about the 9 additional challenges on Hong Kong Offshore Claim on Trading Profits.
If a trading company successfully pursues offshore claims, its profits will not be subject to Hong Kong Profits Tax. For trading company, “Contract Effected Test" is the basic principle determining the source of profits. When both sales and purchase contracts are effected outside Hong Kong, the trading profits could be considered as offshore sourced. In this regard, many corporations misunderstand that if they have not performed any trading activities in Hong Kong, their offshore claim are guaranteed. However, in reality, the Hong Kong Inland Revenue Department is expecting more. Let’s take a look of the 9 additional challenges.
Number 1... if your suppliers or customers are Hong Kong incorporated companies, the IRD would presume that your Hong Kong company carries out sales or purchase activities in Hong Kong. In practice, strong document proof is required to demonstrate the opposite.
Number 2...if your Hong Kong company has no staff, the IRD will consider the Hong Kong company has not carried out any business activities to earn profits. It may deem your Hong Kong companies earns the profits due to its Hong Kong status or for tax avoidance reasons, and thus disallow your offshore claim.
Number 3... No group cost recharge arrangements... It is common that all the trading work are performed by staff of overseas group companies. The IRD may disregard their work done and focus on the work performed the Hong Kong company itself. The offshore claim may turn out to be not valid.
Number 4... the arrangements are for tax avoidance purposes...if the Hong Kong company is the procurement or sales arm of the group, and internal pricing arrangements guarantee a profit for the Hong Kong trading company without hiring a staff, the IRD may consider your Hong Kong trading company is set up for tax avoidance purposes, and your offshore claim may be disapproved.
If you want to know more about the remaining five rules, subscribe to our channel and continue to watch our Part 2 Video.
