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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/

To promote the export of goods, in China there is no VAT applicable to exported goods. When a company sources/buys products from the supplier, the supplier VAT invoice (Fapiao) includes VAT (input VAT). Normally, the input VAT could be deducted from the output VAT, but for exported goods there is no output VAT. Therefore, the government has set up a system for the refund of export-related VAT. Companies can claim back the input VAT paid for export goods through the monthly export VAT refund claim.

Who is eligible for export VAT refund?

Generally, to be eligible for export VAT refund, the export enterprise must:

Which industries are eligible for VAT rebates?

As stipulated in the STA Announcement (2022), the VAT rebate policy has been extended to include all eligible companies in the following six industries:

The tax rebate procedure

In order to enjoy tax rebate policies, exporters should provide Chinese authorities with several documents:

Value Added Tax (VAT) in China

Value-added tax (VAT) is one of the major indirect taxes in China.

VAT rate: The standard VAT rate in China is 13%, but there are also reduced rates of 9%, 6%, and 3%.

Invoicing (VAT Fapiao): All businesses must issue VAT invoices for the sale of taxable goods and services in China. There are two types of invoices: general VAT invoices and special VAT invoices.

General VAT taxpayers refer to enterprises whose accumulated taxable income during a consecutive period of no more than 12 months, or four quarters, exceeds RMB 5 million or those who have a sound accounting system. Multiple VAT rates of 13%, 9%, and 6% apply to general VAT taxpayers. The input VAT can be credited against the output VAT.

Small-scale VAT taxpayers refer to enterprises whose accumulated taxable income during a consecutive period of no more than 12 months, or four quarters, are below RMB 5 million or without a sound accounting system. A 3% levying rate is applied to small-scale VAT taxpayers, but they cannot deduct input VAT from output VAT.

	general VAT taxpayer	small-scale VAT taxpayer
Taxable income	> RMB 5 million	≤ RMB 5 million
Rate	6% to 13%	3%
VAT payable	OUTPUT VAT IN THE CURRENT PERIOD   –   INPUT VAT IN THE CURRENT PERIOD	SALES   x   VAT RATE
Pros + + +	Tax-saving when low profit (low-markup) products; collect and verify special VAT from supplier for VAT deduction, apply VAT tax rebate for export busienss.	Tax-saving for high-profit (high markup) products; Can file VAT tax quarterly; Doesn’t need to collect and verify special VAT invoices for deduction, and the tax calculation method is straightforward; and Can enjoy certain VAT exemption benefits for small transactions.
Cons – – –	as to file tax monthly; Has to collect special VAT invoices and verify them to ensure the input VAT deduction; and increasing tax burden when profit markup on cost higher than critical ratio*, or when the enterprise is unable to collect special VAT invoices for input VAT deduction.	Has to keep in lower annual income (below RMB 5 million), can no enjoy export VAT tax rebate. Most general VAT taxpayers are dedicated to dealing with general VAT taxpayers. Small-scale VAT taxpayer cannot deduct input VAT from output VAT.
*The critical ratio here refers to a ratio of profit markup on cost under which the tax burden for the general taxpayer and small-scale taxpayer is the same. It varies based on the actual tax rates applied.

Chinese VAT rates:

	Tax items	VAT rate
Most goods and some services	Sales and imports of most goods (unless otherwise specified), Labour services, including processing, repair, or assembling services, Tangible moveable property leasing services	13%
Real estate, transportation, postal and agriculture	Agricultural, forestry, animal husbandry products: grains, vegetable oils, fresh milk, medicinal and other plants, agricultural machinery, fertilizer, and pesticide, Tap water, heating, cooling, gas, coal/charcoal products for residential use, Books, newspapers, magazines, audio-visual products, electronic publications, Transportation services, Postal services, Basic telecommunications services, Real estate, construction, transfer of ownership of properties and land use rights, real estate leasing service, Other goods specified by the state council	9%
Services	Financial and insurance services, Modern services: research and development, technical services, information technology services, cultural and creative services, logistics and ancillary services, leasing, consulting, radio, film and television services, etc. Lifestyle services: education, healthcare, travel, entertainment, catering, accommodation, cultural and sports services, other daily lifestyle services, Value-added telecommunications services, Intangible assets, excluding land-use rights, Sales of virtual props for online games	6%
Small-scale taxpayers	For most goods and services.	3% (except certain actual transactions applicable to 5% VAT rate)
Exports	Export of goods and services (except where otherwise stipulated by the State Council)	0%

General VAT taxpayer calculation method:

For general taxpayers, the calculation formula is as follows:

Tax payable = current output VAT – current input VAT – previous surplus input VAT

The output VAT is calculated as follows:

Output VAT = sales volume x tax rate

Where the sales volume is determined as follows:

Sales volume = sales volume including taxes / (1 + Tax rate)

The input VAT can be deducted from the output VAT to arrive at the tax payable. However, not all input VAT can be deducted. In order to deduct any input VAT, the company must receive a special VAT Fapiao where the tax amount is specified, and this amount must be verified in the online system of the tax bureau.

If the current output VAT is higher than the current input VAT, this will result in a VAT tax payable for the company. If the current input VAT is higher than the output VAT, the surplus amount of input VAT can be carried forward to the next period.

Small-scale VAT taxpayer calculation method:

The calculation method for small-scale taxpayer is a simplified calculation, because no able to deduct input VAT.

Tax payable = sales volume x tax rate (3%)

Sales volume = sales volume including taxes / (1 + Tax rate 3%)

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At Colvass Consulting, we take a detailed approach to accounting and bookkeeping services, acting as our client’s reliable partner to ensure the accuracy of their financial records and compliance with local regulations.

Outsourcing your accounting, bookkeeping, and payroll procedures to Colvass Consulting, you receive the collective experience of financial professionals with experience across a vast range of industries and business sizes to help you grow your business.

Is VAT in China Refundable?

終止雇傭合約

雇主或雇員須給予對方適當的通知期或代通知金已終止雇傭合約。所需的通知期或代通知金如下：

雇傭情況			通知期	代通知金
在試用期内	試用期内的首個月		無須通知期	無須代通知金
	試用期内的第一個月后	雇傭合約有明確規定	依照合約訂明的通知期，但不少於7天	如通知期是以日或星期為單位：=「每日平均工資」×「通知期內通常須付給僱員工資的日數」 如通知期是以月為單位：=「每月平均工資」×「通知期的月數」
		雇傭合約無明確規定	不少於7天通知
無試用期/完成試用期的連續性合約	雇傭合約有明確規定		依照合約訂明的通知期，但不少於7天
	雇傭合約無明確規定		不少於1個月通知

**無試用期 / 完成試用期的非連續性合約，所需的通知期為議定的期限。

在終止僱傭合約時，僱主應支付的解僱補償一般包括未發放的工資、代通知金（如適用）、年假薪酬、年終酬金、長期服務金或遣散費（如適用）及其他僱傭合約內列明的款項。除遣散費外，僱主必須在僱傭合約終止後 7 天內支付僱員應得的解僱補償。遣散費的支付期限則為僱主接獲僱員所發出的追討遣散費通知書後 2 個月內。

僱主如果未能在僱傭合約終止日或合約到期日後7天內支付工資，須就尚未清付的款額支付利息給僱員。

**僱主如故意及無合理辯解而不依時支付解僱補償給僱員，可被檢控，一經定罪，最高可被罰款 35 萬元及監禁 3 年。

長期服務金

僱員按連續性合約受僱滿5年，並符合下列其中一項條件，可享有長期服務金：

被僱主解僱（但並不是因裁員或犯嚴重過失而被即時解僱）；

在固定期限的合約期滿後不獲續約；

在職期間死亡；

獲發註冊醫生或註冊中醫發出指定的證明書，證明永久不適合擔任現時工作；

65 歲或以上辭職。

**僱主須在僱傭合約終止後 7 天內支付長期服務金給 僱員，支付給已故僱員的家屬的期限則另有規定。

**僱主如故意及無合理辯解而逾期不支付長期服務金給僱員，可被檢控，一經定罪，最高可被罰款 35 萬元及監禁 3 年。

**若僱主無合理辯解而逾期不支付長期服務金給已故 僱員的家屬，可被檢控，一經定罪，最高可被罰款 5 萬元。

遣散費

僱員按連續性合約受僱不少於 24 個月，並符合下列 其中一項條件，可享有遣散費：

因裁員而遭解僱；

在固定期限的合約期滿後，因裁員而不獲續約；

遭停工。

**僱主須在收到僱員以書面發出申索遣散費的通知後的 2 個月內支付遣散費。

**僱主如無合理辯解而拖延支付遣散費給僱員，可被 檢控，一經定罪，最高可被罰款 5 萬元。

長期服務金、遣散費的計算方法：

月薪雇員	（最後1個月的全月工資* × 2/3）#× 可追溯的服務年資
日薪或件薪雇員	（僱員最後工作的30個正常工作日中由僱員選任何18 天工資*）#× 可追溯的服務 年資

* 僱員亦可選擇以緊接其合約的終止日期前 12 個月的平均工資計算。（如僱員的僱傭合約是以代通知金的方式終止，僱員可選擇以緊接有關代通知金計至該日為止的日期前 12 個月的平均工資計算。）

# 以 $22,500 的三分之二（即 $15,000）為上限。

雇傭保障

僱員在下列情況下可向僱主提出僱傭保障的補償申索：

►  不合理解僱（僱員須按連續性合約受僱不少於 24 個月）；

►  不合理更改僱傭合約條款（僱員須按連續性合約受僱）；

►  不合理及不合法解僱。

僱主如非根據下列任何一項正當理由解僱僱員或更改 僱傭合約條款，便屬不合理：

► 僱員的行為；

► 工作所需的能力或資格；

►  裁員或其他真正的業務運作需要；

► 法例的規定；

► 其他實質理由。

僱傭保障的補償包括復職或再次聘用、終止僱傭金及 補償金。（補償金只適用於不合理及不合法解僱）

the city of Shenzhen, which is also known as the “Silicon Valley of Hardware”. The city’s ecosystem of entrepreneurs, talent, suppliers, and factories, which makes it an ideal place for hardware startups.

Welcome to the city of opportunity, Shenzhen

Shenzhen is an excellent place to do business for the Chinese and global export markets. It has various advantages that make it a great place to start or expand a business. The city offers tax incentives, resources, and training for entrepreneurs, and helps businesses develop innovative technologies and products. There is also financial support available to help businesses grow.

Set up a 100% foreign-owned Limited Liability Company

There are steps to set up a company in Shenzhen:

1. Get familiar with local authorities and institutions departments
2. Choose your company name in Chinese
3. Choose the legal entity of your company
4. Appoint a company secretary
5. Rent the registered address of your company
6. Prepare the incorporation documents
7. Submit to the Business License Registry
8. Pay the government fee
9. Get relevant permits and licenses
10. Keep up with your taxes and financial reporting

If you have any questions about how your business can be a success in Shenzhen, please do contact us — it’s both our job and pleasure to assist.

Hong Kong Two-tiered Profits Tax Rates Regime

What Is a Two-Tiered Tax Rate? The Two-Tiered Tax Rates Regime involves two profit tax rates. Under the new system, the first HK$2 million of a company’s profits are taxed at a lower profits tax rate of 8.25%, while profits above HK$2 million are taxed at the standard profits tax rate of 16.5%.

The profits tax rate for the first HK$2 million (US$250,000) of profits of corporations will be lowered to 8.25%. Profits above that amount will continue to be subject to the tax rate of 16.5%.

The hong Kong Two-Tiered Profit Tax has been implemented to support small and medium-sized enterprises. This will reduce the tax burden on enterprises, especially SMEs and startup enterprises, and will help foster a favorable business environment, drive economic growth, create job opportunities and enhance Hong Kong’s competitiveness.

However, if an entity has one or more connected entities, the two-tiered profits tax rates can only apply to one nominated entity among its connected entities. The others will not qualify for the two-tiered profits tax rates. 

Interest, gains or profits derived from qualifying debt instruments that are already subject to tax at half-rates under the existing provision will be excluded from the proposed two-tiered profits tax rates regime.

Finance Management Accounting Services

We are one of the leaders in management accounting services, managing vital financial data and providing perfect solutions for the clients for the development of your respective business.

Forecasting and planning, performing variance analysis, reviewing and monitoring costs is done by our registered chartered accountants who will act as your finance director.

We have expertise in providing the following services:

• Prepare management reports on regular basis to keep up continuous records of your cash flow.
• We act as a mediator to set all your contractual obligations coming in management accounts.
• Our proper guidance makes you to stick to your core competency so that people can’t compete with you.
• We take care of all the reports and makes sure that all the reports are in sequence, data has to make sense and to have proper documentation to back it up.
• Our strategic approach makes us different from others.
• Identify–>Analyze–>Record–>Post–>Prepare Trial balance.
• Reports can be generated depending on your business type and as per your requirements. We can manage your accounting reports monthly, quarterly, half yearly or any other period.

Avail the following reports from us:

Cash Reports
Status Reports
Profit and Loss Reports
Projected accounting for 5 years and much more.

Following services are provided

• Generate regular management reports to monitor your cash flow, observe trends and seek additional capital (if required) based on accurate forecasts
• Assistance on meeting your contractual obilgations of providing management accounts on a regular basis.
• We guide you to ensure that your business is on the right track and in line with your anticipated / projected sales /income / expenditure / profits.
• Our reports can help you make management decisions to get your company back on track and / or stay on track to profitability.
• Reports are generated on monthly, quarterly, half yearly or any other period that is required by you.

We prepare all management accounts as per your requirement and deliver it as per agreed time lines.