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How To Claim Exemption of Offshore Profits Tax ?
Dear Sir/Madam
Are you looking for some professional firms who can claim exemption of Hong Kong profits tax for your offshore business ? Or you are intending to register a Hong Kong company but now you want to search some information about the tax issues of Hong Kong ? If so, welcome to our website, I am sure that the information given here you cannot find from other professional websites. PLEASE TAKE A COUPLE OF MINTES TO READ OUT THROUGH OUR WEBSITE.
Introductory of Hong Kong Tax Systems
Hong Kong is a local tax system. The income with a Hong Kong source is subject to Hong Kong tax. As compared with other countries such as USA, UK, Canada, New Zealand, they are global tax system, no matter where you get the income, you are still subject to income tax.
Hong Kong tax is broadly classified into three types; profits tax, salaries tax and property tax. Profits tax is charged from the profits of business; salaries tax is charged from the employment income; property tax is charged from the rental income from renting out the property.
The laws relating to execution of Hong Kong tax are Inland Revenue Ordinance, case laws, as well as guidance notes (Departmental Interpretation and Practice Notes).
Every year, a taxpayer will receive a tax return on 1st April. They are required to fill up the details, with supporting documents, and file to Hong Kong tax departments within definite period of time; except the new company business, a profits tax return will be issued after the 18 months of commencement of company. Once the tax assessors receive a tax return from the taxpayers, they will assess their income and issue a tax demand note and request the taxpayers to pay tax within a specific period of times.
Profits tax issues
What is a profits tax ? Who is required to pay profits tax ? I am doing offshore business, do I need to pay profits tax ? I am doing Hong Kong business, but using offshore companies, do I need to pay tax ? All the questions, even more, you can find the answers from below.
Profit tax is governed under S.14 of Hong Kong Inland Revenue Ordinance. In its rule, it says "individuals, corporations, partnerships and all unincorporated business ventures carrying on a trade, professional or business in Hong Kong are subject to profits tax on profits which are generated from sources within the territory." If you are bad in English, I think you will be difficult to see what it says.
Basically it lays down three conditions to charge tax:
- it charges only on profits not losses. If the company made loss, it is not required to pay tax, or if the tax had been paid, it will get refunded;
- it charges on individuals, corporations, partnerships and all unincorporated business ventures, it doesn't mentions whether they are local companies or overseas companies; so under this rule, overseas companies will also be subject to profits tax if other conditions are also met;
- profits of trade, profession or business are subject to profits tax; if income from property, or from employment, they are subject to other tax, at least not profits tax;
- profits which are generated within the territory of Hong Kong are subject to Hong Kong profits tax; if the profits which generated outside the territory of Hong Kong, they are not subject to profits tax. It is a source issue.
It is the issues most overseas investors want to know whether my offshore business is subject to Hong Kong profits tax ? How to determine offshore business ? If so, how can I claim ?
Are offshore profits exempt from Hong Kong profits tax ?
Now you know the answer, as least from the board principle. As Hong Kong tax system is using local tax concept, and in tax law, the profits tax only charges on profits if the profits are generated or arise in Hong Kong or are derived from Hong Kong. Therefore, offshore profits are not subject to Hong Kong profits tax.
Now you will meet some scenarios.
First, you have registered a Hong Kong company, and you do business in Hong Kong. Are you required to pay Hong Kong tax ? Yes, you are required to pay Hong Kong tax, as your sources are in Hong Kong.
Second, you have registered a Hong Kong company, and you do business outside Hong Kong such as you buy goods from China and sell to USA. Are you required to pay Hong Kong tax ? No, you are not required to pay Hong Kong tax, as your sources are outside Hong Kong.
Third, you have registered an overseas company, and you do business in Hong Kong. Are you required to pay Hong Kong tax ? Yes, you are required to pay Hong Kong tax, as your sources are in Hong Kong.
Fourth, you have registered an overseas company, and you do business outside Hong Kong. Are you required to pay Hong Kong tax ? No, you are not required to pay Hong Kong tax, as you sources are outside Hong Kong.
FINAL, you have not registered Hong Kong company, nor overseas company, and you do business in Hong Kong, are you required to pay Hong Kong tax ? Yes, you are required to pay Hong Kong tax, as your sources are in Hong Kong. You haven't registered a company is another issue.
From the above scenarios, you will know whether your business is subject to Hong Kong tax or not ?
However, what if the following issues arise ?
You registered a Hong Kong company and you do business in Hong Kong, but the supporting services such as shipping, accounting, and administrative works are outside Hong Kong, even the payment settlements are made outside Hong Kong.
You registered a Hong Kong company, you do overseas trading business such as you buy from India and sell to UK. But you open a bank in Hong Kong, all the settlements are made through Hong Kong bank accounts, even the supporting services such as issuing invoices, accounting, and records keeping are done in Hong Kong.
In fact, the source issues are very complicated, so much work must refer back to cases and IRD guiding notes.
The leading cases to determine the source of profit are:
A) The Privy Council in CIR v Hang Seng Bank Ltd (1990) 1 HKRC 90-044 - in this case, the taxpayer carried out trading of investment products outside Hong Kong. However, the taxpayer carried on all business and made investment decisions in Hong Kong. The Privy Council said that it looks to see what the taxpayer had one to earn the profit. In this case, as the selling and buying investment products were carried out outside Hong Kong, the profits are offshore source and so are not subject to Hong Kong profits tax.
B) The Privy Council in CIR v HK-TVB International Ltd (1992) 1 HKRC 90-064- in this case, the taxpayer carried out major business in Hong Kong and sold the copyrights of Chinese firms outside Hong Kong. They operated wholly outside Hong Kong. They sent the representatives abroad to solicit business and negotiate the terms and sign up the contracts. However, the contracts were in Hong Kong, and the payments were settled in Hong Kong. The Privy Council said again that it must to see what were the operations which produced the profits and where those operations took place. The Privy Council emphasized the importance of considering the specific operations of the taxpayer which produced the relevant profits, rather than all of the operations of the taxpayer. As the provision of intellectual property rights was rendered outside Hong Kong, which are the profit-making activity, the profits are offshore source and so are not subject to Hong Kong profits tax.
C) Wardley Investment Services (Hong Kong) Ltd v CIR (1993) 1 HKRC 90-068 - the Court of Appeal emphasized again the importance of the profit-producing activities of the taxpayer, as opposed to considering overall operations of the business of the taxpayer, and applied the rulings of Hang Seng Bank Ltd and HK-TVB cases. The taxpayer was a Hong Kong investment adviser and carried out management of customers' investment portfolios under management contracts. The management contracts did include employment of overseas stockbrokers. The huge commissions received from overseas brokers became a dispute issue of Hong Kong sources. At last, it ruled out at Hong Kong sources because it was the management contracts which generated income.
D) The High Court in CIR v Euro Tech (Far East) Limited (1995) 1 HKRC 90-074 - the taxpayer only proceed orders and collected and made payments, the business activities in Hong Kong are minimal. However, the Court determined it is Hong Kong source.
E) The Court of Appeal in CIR v Magna Industrial Co ltd (1997) HKRC 90-082 - in this case, it overruled Euro Tech. In this case, the networks of selling and buying activities were done outside Hong Kong, even if certain activities took place in Hong Kong such as invoicing, shipping, collecting payment, etc. they were ancillary and so not the true Hong Kong source.
In fact, the above cases are the major ones only, there are in fact numerous. This is always a dispute between Hong Kong IRD and the taxpayers. Therefore, Hong Kong IRD has issued some guidelines. It lays out six basic principles in Departmental Interpretation and Practice No 21: Locality of Profits:
a) The question of locality of profits is a hard, practical matter of fact. No universal rule will cover every case. Whether profits arise in or are derived form Hong Kong depends on the nature of the profits and the transactions giving rise to them;
b) The broad guiding principle is that one looks to see what the taxpayer had done to earn the profits in question and where he has done it. In other words, the proper approach is to ascertain what the operations were which produced the relevant profits and where those operations took place;
c) The distinction between Hong Kong profits and offshore profits is made by reference to gross profits arising from individual transactions. In other words, it determines from individual selling and buying activity;
d) In certain situations, where gross profits from an individual transaction arise in different places, they can be apportioned as arising partly in and partly outside Hong Kong;
e) The place where day-today investment decisions are taken does not generally determine the locality of profits;
f) The absence of an overseas permanent establishment of a Hong Kong business does not, of itself, mean that all of the profits of that business arise in or are derived from Hong Kong. However, it can be in RARE CASES that a taxpayer with a principal place of business in Hong Kong can earn profits which are NOT CHARGEABLE TO PROFITS TAX.
The guidelines further lay out the business operations of TRADING PROFITS which are Hong Kong sources or NOT Hong Kong sources:
i) Both contract of purchase and contract of sale effected in Hong Kong ........ PROFIT FULLY TAXALBE
ii) Both contract of purchase and contract of sale effected outside Hong Kong ........ PROFITS FULLY NOT-TAXABLE
iii) Either contract of purchase or contract of sale effected in Hong Kong ........ PROFITS FULLY TAXABLE (initial presumption)
iv) Sale made to Hong Kong customer ........ Sale contract usually taken to have been effected in Hong Kong
v) Commodities or goods purchased by Hong Kong business from Hong Kong supplier or manufacturer ........ Purchase contract usually taken to have been effected in Hong Kong
vi) Effecting of purchase and sale contracts requires no travel out of Hong Kong (carried out in Hong Kong by phone, fax, etc) ........ Contracts considered effected in Hong Kong
Remark: "Effect" is interpreted as the actual steps leading to the existence of a trading contract including negotiation, conclusion and execution, it is not just simply meant legally executed according to the formal rules of contracts offer and acceptance.
In revised guiding note issued by IRD, it confirms that the following administrative functions or activities are not subject to Hong Kong profits tax:
- issuing or accepting invoices (not orders) to or from Hong Kong customers or suppliers on the basis of contracts of sales or purchases already effected before;
- arranging letters of credit;
- operating bank accounts;
- making and receving payments;
- maintaining accounting records.
Therefore, when the business activities are truly supporting to the profits-generating activities conducted outside Hong Kong, the business should be free from profits tax liability.
Basically, when you form a company in Hong Kong, but you never have an establishment in Hong Kong, nor any staff there. All business operations are run outside Hong Kong, even you hire Hong Kong professional firms to handle the administrative functions for you, keep all paper works for you, and even you open an offshore bank account in Hong Kong. In this situation, it is almost like your case, I think, you can claim exemption of profits tax.
However, can how you do ? It is an another issue I will discuss with you.
How to claim offshore profits ?
Every year, you will receive a tax return either in 1st April, or after 18 months of incorporation of company if it is a first company audit, then the general practice is that we will make extend for you until middle of November if it is a profits case (the company in question has made a profits and is required to pay tax) or make further extension until middle of February of next year if it is a loss case (the company in question has made a loss and in law it is not required to pay tax).
Then we will arrange our clients to pass the documents or records to us so that we can start working on accounting, and auditing and tax papers in case the clients haven't hired their accounting staff or they pass the accounting papers, records and documents to us for auditing and tax paper works in case the clients have hired their accounting staff and they have done the accounting works.
In either case, when we have done the audit work we will evaluate their cases whether they can claim exemption of profits tax. OUR SUCCESSFUL RATE IS 100%.
The following is the key consideration why clients cannot claim for exemption of profits tax:
- They keep bad records or they even lose some records or even no records at all;
- They have involved a few transactions in Hong Kong in such a way that in 100 or 1,000 trading transactions, only one transaction made with either customers or suppliers is in Hong Kong, the law will treat all the trading operations as HONG KONG SOURCE;
- They never follow our internal guidelines when they MAKE PREPARATIVE WORKS such as HOW TO MAKE CONTRACTS WITH SUPPLIERS OR CUSTOMERS, HOW TO ISSUE INVOICES TO CUSTOMERS OR ARRANGE SUPPLIERS TO ISSUE INVOICES TO YOU, HOW TO MAKE DOCUMENTATIVE WORKS, etc ..... IN SUCH AS WAY THAT IN THE FUTURE WE WILL CLAIM EXEMPTION OF PROFITS.
I have met a lot of cases, either they are referred from our clients or other professional firms or they direct find our company but they have one in common:
THEIR PROFESSIONAL FIRMS NEVER CONSULT CLIENTS HOW TO DO NEXT WHEN THEY HAVE FORMED A COMPANY. EVEN THERE ARE ONLINE WEBSITE THAT THEY CAN PROVIDE GOOD SERVICES FOR COMPANY FORMATION, BUT WHAT'S ABOUT THE NEXT STEPS ?
Here are true story.
I have formed a company with my professional firm. We are totally replied on them, because for our roles, we find businesses. We even paid over US$8,000 a yearly fee for secretary works and accounting works. But later they asked us to pay huge amount of Hong Kong tax. I wanted them to do something for us but nothing and later I only paid the tax but I didn't know why. They never consulted us. NEVER AND NEVER.
I had registered two Hong Kong companies. We do business in Russia. Even our staff and our office are in Russia. Our past professional firm charged to us over US$10,000 for annual secretarial works, accounting, auditing, and claim offshore profits. However, over three years, I got something strange. The tax department has issued enquiries for 2007 filed report, they have not filed for 2008, now in deadline for 2009. I even don't know whether I have already required to pay penalty for late filing for 2008, or even prosecution had been charged to us. I paid much so that I totally relied on them. I tried to find Stephen who answered us that: a) your past auditor had made bad comments on your 2007 reports, it is impossible to claim offshore profits; b) they still not file 2008 return, so the penalty had been charged to your company; c) they haven't started working for 2009 works .
Almost 95% of the cases are that their professional firms only form a company for their clients, but they will not consult them how to do next. Certainly, they will follow their cases on yearly basis as their company has to do annual filings. However, when they have issued a tax return, they will only either ask their clients to pass the documents to them and do accounting, auditing and tax or file zero tax return which is in breach of Hong Kong tax law. When they have filed the documents to them, their professional firms have done the report and ask them to pay huge tax. In this case, the client has nothing to do but either ignore the company and form a new one or pay tax and find another professional firm.
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