Grow Your Global Business Fast

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3 Essential Steps to Qualify

1. Incorporate a Hong Kong Company
   • Registration: Register with the Companies Registry and Inland Revenue Department (IRD).
   • Requirements:
     • At least 1 director (resident or non-resident).
     • Minimum HKD 1 share capital.
     • Local company secretary and Hong Kong office address.
     • Submit Articles of Association, incorporation forms, and obtain a Business Registration Certificate.
   • Tip: Engage a professional service for streamlined compliance, especially for offshore tax exemption guidance.
2. Prove Offshore-Sourced Income
   • Key Criteria:
     • No Hong Kong-based operations: Avoid sales, contracts, employees, offices, or suppliers in Hong Kong.
     • Focus on transaction location: Profits must stem from activities conducted entirely outside Hong Kong.
   • Evidence Required:
     • Contracts/Agreements: Signed and executed outside Hong Kong.
     • Financial Records: Offshore invoices, bank statements (foreign currency), and shipping documents.
     • Operational Proof: Hosted overseas websites, third-party logistics outside Hong Kong, and foreign client/supplier communications.
   • Example: A Hong Kong-registered e-commerce company selling to Europe, sourcing goods from China, and processing payments in EUR via an overseas bank qualifies for exemption.
3. Maintain Robust Documentation
   • Records to Keep:
     • Basic Documents: Certificate of Incorporation, Articles of Association, organizational charts.
     • Business Records: Contracts, email correspondence, outsourcing agreements, and economic substance proof (e.g., overseas office leases).
     • Financial Proof: Audited accounts, transaction trails, and tax filings.
   • Compliance:
     • Submit an Offshore Tax Claim (OTC) with the first Profit Tax Return (due 18 months post-incorporation).
     • Annual audits are mandatory to maintain exemption status (valid for 3–5 years).

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Key Concepts & Requirements

• Territorial Tax System:
  • Hong Kong taxes only locally sourced profits at 16.5%. Offshore income is exempt if proven foreign-sourced.
  • Source Determination: Based on the “operations test”—where profit-generating activities occur, not company registration.
• Offshore Tax Claim (OTC):
  • Submit during the first Profit Tax Return filing.
  • IRD review takes 6+ months; proactive communication is critical.
  • Approval grants tax exemption for 3–5 years, renewable upon re-examination.
• Economic Substance Requirements (FSIE Scheme):
  • Applies to foreign passive income (e.g., dividends, IP royalties, equity gains) for multinational enterprises (MNEs).
  • Non-pure equity entities: Must demonstrate substantial operations in Hong Kong (e.g., qualified employees, local expenditure).
  • Pure equity-holding entities: Simplified requirements but must manage investments locally.
  • Note: FSIE rules expanded in 2024 to include property disposal gains.

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Common Pitfalls & Solutions

• Rejection Reasons:
  • Local activities: Hiring staff, signing contracts, or storing goods in Hong Kong.
  • Insufficient evidence: Missing contracts, unclear transaction trails.
  • Misunderstanding “offshore company” status: Incorporation alone does not guarantee exemption.
• Solutions:
  • Eliminate Hong Kong ties: Centralize operations overseas.
  • Strengthen documentation: Use third-party audits, detailed invoices, and correspondence logs.
  • Consult experts: Tax advisors or incorporation services can navigate complex IRD requirements.

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FAQs & Additional Insights

Q: Who is eligible for offshore tax exemption?
A: Hong Kong-registered companies with zero profit-generating activities in Hong Kong. Unincorporated entities (e.g., sole proprietorships) are ineligible.

Q: What income qualifies as offshore?
A: Profits from sales, services, or IP licensing executed outside Hong Kong (e.g., contracts signed abroad, goods shipped directly from China to Europe).

Q: When to file an Offshore Tax Claim?
A: With the first Profit Tax Return (within 18 months of incorporation). Late submissions delay exemption approval.

Q: Are there other tax incentives?
A: Yes, including:

• R&D tax deductions for innovation-driven businesses.
• Property tax concessions for eligible rental income.
• Industry-specific relief for sectors like finance and shipping.

Q: What if my application is rejected?
A: Review IRD feedback, address gaps (e.g., provide additional contracts), and resubmit. Professional guidance improves success rates.

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Final Tips

• Stay updated: Monitor changes to the FSIE regime (e.g., 2024 amendments).
• Leverage technology: Use digital accounting tools to streamline record-keeping.
• Plan long-term: Ensure business operations align with offshore criteria to avoid future disputes.

Key Resources:

• IRD’s Territorial Source Principle of Taxation.
• IRD’s Profits Tax Exemption Guidelines.
• IRD’s Foreign-Sourced Income Exemption (FSIE) Scheme.

The costs incurred in operating a business and making sales are known as business expenses. The tax commissioner does not offer a comprehensive list of legitimate startup and small-business deductions due to the scope of their mandate. An expense is deductible if it is “ordinary and necessary” to operate a business in your sector.

For this reason, it is well worth the time to arrange your expenses so that your company can make use of all allowable write-offs, develop a sound financial plan, filing the correct amount in yearly net profits taxes, and doesn’t need to sweat an annual audit.

What Are Business Expense Categories?

Business expense categories are organized groups of expenses that a company incurs while operating. The categories act as a framework for allocating spending, which facilitates tracking where money is spent and enables financial performance analysis. Businesses can acquire a better understanding of their spending patterns and make well-informed decisions about budgeting and resource allocation by classifying related expenses together, such as office supplies, marketing expenditures, or employee salaries.

business expense categories:

1.Advertising and marketing

2.Continuing education

3.Credit and collection fees

4.Bank fees

5.Dues and subscriptions

6.Employee benefit

7.Insurance

8.Maintenance and repairs

9.Legal and professional expenses

10.Office expenses and supplies

11.Telephone

12.Utilities

13.Postage and shipping

14.Printing

15.Rent

16.Salaries and other compensation

17.Travel

18.Business meals

19.Business use of your car

20.Moving expenses

21.Depreciation

22.Charitable contributions

23.Mortgage interest

24.Software

25.Books and magazine subscriptions

26.Medical expenses

27.Licenses and permits

28.Manufacturing or raw materials

29.Retirement contributions

30.Real estate taxes

31.Client gifts

Business owners frequently give themselves a salary, which functions in the same manner as a traditional job. The owner pays personal income tax on the salary, which is recorded as an expense in the company’s books.

How much to pay yourself ?

The tax regulation states that entrepreneurs are permitted to give themselves a “reasonable salary.” However, how can one ascertain what is reasonable?

One of the entrepreneurs said, “I advise paying yourself a modest salary, as modest as you can afford.“

Here are two common methods for figuring out your pay:

• Make your pay based on your own spending.
• Distribute profits as a salary.

When can you start paying yourself?

An owner’s salary is frequently the last item on the small business budget when times are tight. Paying yourself, however, becomes possible as your business’s revenue stabilizes.

To decide if you’re ready to begin paying yourself a salary, posing the following three questions to yourself:

• Do I make a consistent cash flow?
• Do my projected earnings remain consistent?
• Is my company profitable?

You can afford to pay yourself if you can say “yes” to all above three questions.

Other payroll obligations for a Hong Kong company

In contrast to the majority of other nations, the employer in Hong Kong does not withhold individual income tax, or salaries tax. Individuals must pay their taxes on their own instead.

As such, employers in Hong Kong are subject to just two administrative requirements.

1. Keeping payroll records

The following details about their employees must be maintained on file by the company/employers:

• Particulars of the employee;
• Type of work: either full- or part-time;
• Working place;
• The total amount of compensation, including non-cash and other fringe benefits;
• Contributions to the Mandatory Provident Fund or its equivalent;
• The employment contract; and
• Duration of employment.

2. Reporting remuneration paid to an employee

Every year, companies will receive the Employer’s Return from the Hong Kong tax department. Even if the company does not hire any employees, the business has not started, or the business has ceased, it still needs to complete the Employer’s Return and file it with the tax department within a month of receiving it.

Useful link: https://www.gov.hk/en/residents/taxes/salaries/