Hong Kong Taxation System

If you are interested in setting up a business in Hong Kong and would like to more about the taxation system, this post will help you understand it better.

Hong Kong's tax system is simple. It is well known as one of the most business-friendly taxation systems in the world.

It applies a territorial basis for taxing profits from a trade or business carried locally. The profit tax rate is currently 16.5%. With that being said, profit derived from an offshore source is not taxable.

In another words, a person who runs a business in Hong Kong but derives profit from another country is not required to pay tax in Hong Kong.

Who is eligible for an offshore status?

Any company that has its place of business and place where business decisions are located overseas and has no operations in Hong Kong.

Process

You can apply for profits tax exemption when filing the profits tax return. If you are a newly formed company, you will receive your company's first profits tax return after 18 months from the date of incorporation. You are required to file the profits tax return within 3 months together with audit report. You need to inform your auditor that you're interested in applying for the tax exemption so he or she can present your accounts and profits tax return in a way that your Hong Kong company's profits are not subject to HK profits tax.

Once The Inland Revenue Department in Hong Kong receives the profits tax return, they will start investigating the application. After several months, you will receive a reply letter with questions. You must provide all answers and submit supporting documents (e.g. contracts, email communication with suppliers, etc.).

There may be some other communication between the IRD and your company before the application is approved.  In some cases, it may take up to a few years.