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Tax Exemption in Hong Kong: Here is Your Comprehensive Guide

If your business had the opportunity to operate tax-free, would you take it? Well, it can happen when you register your company in Hong Kong. Since 1997 when Hong Kong gained independence from the British, one of the areas that it has used to attract offshore investments is a simplified and low tax regime. This guide tells you all that you need to know about tax procedures in Hong Kong, including the possibility of tax exemption.

Is Hong Kong Tax-Free for Business? 

Although you might find some people claiming that Hong Kong is tax-free, the argument is not true. Hong Kong is not tax-free. The main reason people take their businesses to Hong Kong is because they enjoy lower taxes than other countries, especially in the west. As a company, you are required to pay about 17% in taxes on the profits generated in Hong Kong. However, the jurisdiction does not charge taxes on the following:

  • Capital gains
  • Interest
  • Dividend

What Business Qualifies for Tax Exemption in Hong Kong?

Your company in Hong Kong can qualify for tax exemption if it does all business activities outside the island. This exemption is only possible after approval by the Inland Revenue Department. Here is a closer look at some activities that would qualify your company for tax exemption.

  • If your Hong Kong company does not have clients and suppliers on the island. This implies that most of the activities for the company are run from other countries.
  • The company owner as well as its staff operates from outside the country.
  • Your company does not provide any services in Hong Kong.
  • Your company’s day-to-day operation decisions are done and signed outside Hong Kong.
  • Your company in Hong Kong does not have employees on the island, and the owner only visits rarely.
  • The products or services of the company do not enter and are not available in Hong Kong.

NOTE: The territorial concept is very fundamental to company taxation on the Island. Therefore, only profits that your company makes on the island are liable for taxation in Hong Kong. Here is a demonstration. If your company negotiates and concludes the sale contract with a client outside Hong Kong and all relevant operations are made outside the island, you may claim that the profit is non-taxable. 

What You Need to Do to Enjoy Tax Exemption

While the activities that can help you enjoy tax exemption are clear, you are required to apply when filing for the first profit tax returns. Again, you need to appreciate that the examination and ultimate approval for exemption will go on smoothly only if you have the right documents. Once you make the application, the process may take a couple of months. Here is a breakdown of the process:

  • Apply with the relevant documents indicating that profit arose from operations outside Hong Kong.
  • IRD inspects the documents you provide.
  • A letter of tax exemption is granted after IRD is convinced your company qualifies for exemption.

Hong Kong continues to attract more investors because they enjoy a lot of benefits, including the possibility of tax exemption. It is a great idea to work with an agency of experts, not just for company registration in Hong Kong, but also to help you understand the concept of tax exemption, other tax matters, bookkeeping, and drawing strategies for success.