Exemption of Profits Tax in Hong Kong


Firstly, I believe that you had registered a Hong Kong Company previously, and had run effective business, however now you get or will get a tax come back from Inland Revenue Department of Hong Kong and they will request to give your business records for tax evaluation reason. I think you need to know a few issues like … What the tax framework in Hong Kong? What kind of tax Hong Kong has? How that influences the international investors? Is there a compulsion of paying tax if I work outside the country? By what means should I do? What planning I need to do? What are their laws?

Fundamentally, territorial tax framework is being implemented in Hong Kong. It implies the tax is just charged to the individual if the activities by the individual were done in Hong Kong. For instance, if you are running a food business within Hong Kong and making a considerable amount of profits, you are required to pay tax to Hong Kong government. Similarly, if you are working in Hong Kong’s Company and getting a pay for your work or owns a property from which you get some money then paying tax to the government is necessary for you.

Hong Kong tax is broadly characterized into salaries tax, profits tax, along with property tax. In simple words and to be more precise each tax is classified depending on the means of source of income e.g. if you are earning profits out of business then you are liable to pay profit tax same is the case with other two type of taxes. As a matter of fact, HONG KONG has a very simple tax system.

Being an international country sometimes here simple things become much more complicated. Suppose if you are running a restaurant anywhere in the world other than Hong Kong and making a lot of profit do you need to pay tax to Hong Kong’s government? Let explain a more complex situation if you have two branches of restaurant one in Hong Kong and the other one for example in China and both of them are good source of earning money then here question of paying tax rises. To which government you should pay tax. Is it China or Hong Kong or both?

Let’s consider another scenario related to employment. Suppose you work for an USA based organization located in Hong Kong or vice versa and get good wage. In either case do you have to pay the salary tax to Hong Kong government?

Same question arises about the property tax. For example, if you live or work in Hong Kong and buy property in some other country do you have to pay property tax to Hong Kong government?

So here the answer to all the above raised questions. If you work, live or owns a property within Hong Kong then yes you have to pay tax to the government but if you work for an international company that owns property outside Hong Kong then you are not restricted to pay any type of tax to government.

To understand the concept more deeply, it is necessary to mention that the Hong Kong tax system is based on Inland Revenue Ordinance (IRD), Chapter 122 of Hong Kong’s law supported by case laws and guidelines. Just for reference, Section 14 of IRD is related to Profit tax. According to it, profit tax is imposed if the following three conditions are fulfilled;

  • Either a trade, business or profession, otherwise subjected to different tax category
  • Earning assessable profits i.e. if the company made loss, it is not bound to pay tax
  • Profits are made within the Hong Kong

First two clauses are self-explanatory however, third one needs some explanation. What is basically meant from the profits generated within the Hong Kong? Some case studies are mentioned below to clarify the concept, in which Privy Council in CIR is involved.

Case1: Hang Seng Bank Ltd

In this case all the trading is done outside Hong Kong. However, the taxpayer owns a business in Hong Kong and all the trading decision are made within the country but profits earned on the foreign trading not within the country. According to IRD, since these are offshore profits so it is not needed to pay tax to Hong Kong government.

Case2: HK-TVB International Ltd 

Major business were carried out by the taxpayer in Hong Kong and Chinese firm copyrights were sold and completely operated outside Hong Kong. Though the contract was signed in Hong Kong plus all the terms and conditions were also decided in Hong Kong but according to Privy Council, the operations which are the source of gaining profits i.e. the business that run outside the country, so taxpayer is not obliged to pay the tax to Hong Kong government since the sources of profits are offshore.

Case3: Wardley Investment Services - Hong Kong - Ltd

In this case, the Court of Appeal implemented the rulings of HK-TVB and Hang Seng Bank Ltd case and emphasize was given by Court of Appeal on the importance of taxpayer activities of profit-producing, and opposed to monitor the taxpayer overall business operation. The taxpayer was an investment advisor in Hong Kong and under management contracts, manages investment portfolios of customers’. Overseas stockbrokers employment was also included in management contracts. Overseas brokers received huge amount of commissions, which became one of the dispute issue. At last, it became cleared that tax should be paid to the government because the income generated by management contracts were used within Hong Kong.

Case4: Euro Tech - Far East - Limited

In this case the taxpayer carries out payments within Hong Kong. However the overall business activities are minimal inside the country. It was discovered that the source of cashing the profit are the activities within the Hong Kong, so tax have to be paid to the government.

In fact, these mentioned cases are some exemplary cases, there are numbers of such cases. It has always been a conflicting issue between tax payer and IRD. Therefore, IRD has issued some of the principles guidelines to make the concept much clearer under the Practice No. 21 known as “LOCALITY OF PROFITS”, these rules are mentioned below:

  • The question of locality of profits is a hard, practical matter of fact. Every case will not be covered by the universal rule.
  • Depending on the nature of the transaction, profit arise depends on it in Hong Kong
  • The most important one is where are the operations carried out which are the source of gaining profits.
  • Gross Profits that arises from individual transaction, act as a distinction reference between offshore and Hong Kong profits. Individual activities in term of buying and selling help to determine it.
  • If there is a situation in which gross profits that arises from an individual transaction comes from distinct places, then it can be marked as it arises partly in and partly outside from Hong Kong.
  • Profit locality is not determine at the place where investment decisions are taken day to day.

There are rare cases where an international firm with the complete setup of business in Hong Kong doesn’t earn profits within the country and they are not subjected to pay tax to the government. The following guidelines further elaborates the concept of TRADING PROFITS whether the source of profit is Hong Kong or not,

  • Both contract of purchase and contract of sale took place in Hong Kong. In this case, profits are fully taxable.
  • Both contract of purchase and contract of sale took place outside Hong Kong. In this case, profits are not taxable by the Hong Kong’s government.
  • Either contract of purchase or contract of sale took place in Hong Kong. In this case, profits are fully taxable (initial presumption).
  • Sale are done to Hong Kong customer considering that sale contract usually taken place in Hong Kong.
  • Goods purchased by the Hong Kong entity by the manufacturer and the purchase contract took place in Hong Kong.
  • No foreign travel has been done for signing the contract every step carried out within the country. In this case, contracts are considered to taken place in Hong Kong.

In the revised IRD guidelines, it is stated that the following administrative activities and functions are not subjected to Hong Kong profit Tax payment;

  • Accepting or issuing invoices (not orders) from or to customers or suppliers in Hong Kong on the basis of purchases or sales of contracts that had already been effected.
  • Arranging letters of credit.
  • Operating bank accounts.
  • Making and receiving payments.
  • Maintaining accounting records.

To summarize, if all the profit generating activities are carried out outside the Hong Kong than the business is free from Hong Kong profit tax liability.

You, as a taxpayer, should now comprehend whether your business profits are offshore or onshore, and can decide if you can guarantee exemption of offshore profit tax. Certainly, practicing something is different from Law. It is hard to make exemptions of profit tax without the assistance of experts like us. In light of the fact, that an application for exemption case will take you three to six months or even more. The tax authorities will ask you certain unknown questions. Yet, if you answer inaccurately or even fail to give supporting proof, your application will be rejected, not simply at the time of evaluation, but rather over two or three future long periods of assessments.

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