Hong Kong Tax exemptions (Offshore Claims)

Hong Kong Offshore Tax Claims

Hong Kong operates under a territorial source principle of taxation. This means that only profits arising in or derived from Hong Kong are subject to Profits Tax. If your profits are earned from activities conducted entirely outside of Hong Kong, you can apply for an Offshore Claim to exempt that income from tax.

As of 2025, the Inland Revenue Department (IRD) has tightened its scrutiny, particularly following the implementation of the Foreign-sourced Income Exemption (FSIE) regime for certain types of passive income.

1. The Core Principle: The "Operations Test"

The IRD determines the source of your profits by asking: "What has the taxpayer done to earn the profits in question, and where did they do it?" ### Key Factors for Common Business Types:

• Trading (Buying & Selling): The IRD looks at where the contracts of purchase and sale were negotiated, concluded, and executed. If these happen outside HK, the profits may be offshore.

  
  

• Services: The source is generally where the services are physically performed.

  
  

• Manufacturing: The source is where the manufacturing facility is located.

  
  

• Passive Income (FSIE Regime): Since 2023/2024, dividends, interest, IP income, and disposal gains must meet Economic Substance or Nexus requirements to remain tax-exempt if they are "received in Hong Kong."

  
  

2. Steps to File an Offshore Claim

Filing a claim is not an "application" you do once; it is a declaration made during your annual tax filing.

1. Preparation: Separate your "onshore" and "offshore" income in your accounts.

   
   

2. Audit: Your Hong Kong company must still undergo a mandatory annual audit by a CPA. The auditor will note that you are making an offshore claim.

   
   

3. Submission: When filing your Profits Tax Return (PTR), you declare "Nil" assessable profits and attach a "Tax Computation" stating the basis for your offshore claim.

   
   

4. IRD Inquiry: Usually 6–12 months after filing, the IRD will send an Inquiry Letter (a detailed questionnaire). You must provide evidence for every step of your business flow.

   
   

5. Ruling: If satisfied, the IRD will issue a letter confirming the profits are offshore. This status is typically valid for 3 to 5 years, provided your business model does not change.

   
   

3. Documentary Evidence (The "Arsenal")

The burden of proof lies entirely on you. To win a claim, you must keep:

• Contracts: Signed by parties outside Hong Kong.

  
  

• Communication: Email logs showing negotiations with suppliers and customers occurred outside HK.

• Travel Records: Passports and flight tickets of directors/staff traveling to meet clients.

  
  

• Logistics: Bills of lading or shipping documents proving goods never entered HK waters.

  
  

• Office Proof: Evidence of physical offices or staff located in other countries.

  
  

4. Common "Red Flags" that Void a Claim

Your claim will likely be rejected if:

• You have a physical office in Hong Kong with staff performing core duties.

• Contracts are signed by a director while they are physically present in Hong Kong.

• The business has a "Permanent Establishment" (PE) in Hong Kong.

• You fail to respond to IRD inquiries within the typical 1-month deadline.

2025 Update: The FSIE Regime

If your offshore income is passive (like dividends or interest), you must now prove you have "Economic Substance" in Hong Kong (e.g., hiring a certain number of employees or having local operating spend) to maintain the exemption, even if the source is foreign.

Warning: Offshore claims are complex and can take years to finalize. It is highly recommended to consult a Hong Kong tax specialist before your first filing.

Checklist of documents you should start saving for your specific type of business

I've created a "HK Offshore Claim Document Checklist" for you. It includes the essential documents you'll need to substantiate that your core operations take place outside of Hong Kong, such as overseas leases, travel records, and transactional documents.

HK Offshore Claim Document Checklist

Overseas Office/Warehouse Leases & Utility Bills

Employment Contracts & Payroll for Staff Outside HK

Passport Copies & Flight/Hotel Receipts for Business Trips

Sales & Purchase Agreements (Negotiated & Signed Outside HK)

Purchase Orders & Invoices (Supplier & Customer)

Shipping Docs: Bills of Lading, Packing Lists, Air Waybills

Correspondence Logs (Emails/Meeting Minutes) showing negotiations occurred abroad

Overseas Bank Statements & SWIFT/Remittance Records

Audited Financial Statements (with clear separation of Onshore/Offshore income)

Organization Chart showing roles and physical locations of all personnel

consult Bestar Hong Kong tax specialist

Consulting a specialist like Bestar is a strategic move, as the Inland Revenue Department (IRD) has significantly increased its scrutiny of offshore claims. Bestar offers dedicated tax advisory and "Tax Representative" services specifically for navigating the Inland Revenue Ordinance (IRO) and the Foreign-sourced Income Exemption (FSIE) regime.

1. How Bestar Supports Your Offshore Claim

A tax specialist from Bestar can act as your official Tax Representative, which is particularly valuable for the following:

• Risk Assessment: They analyze your business flow to identify "onshore" triggers (like HK-based staff or contracts signed in HK) before you file.

• Structuring: They advise on setting up "Economic Substance" if you are receiving passive income (dividends, interest) to ensure you meet the 2024/2025 FSIE requirements.

• Managing IRD Inquiries: When the IRD sends an inquiry letter (which can be 20+ pages of detailed questions), Bestar drafts the formal technical responses and organizes your evidence.

• Audit Coordination: Since an offshore claim requires an audit, Bestar’s tax team works with their auditors to ensure your financial statements correctly reflect the offshore nature of the profits.

2. Contact Details for Bestar Hong Kong

You can reach their Hong Kong office via the following channels:

• Office Address: Flat D, 20/F, Eton Building, 288 Des Voeux Road Central, Sheung Wan, Hong Kong.

• Phone: +852 3565 1861

• WhatsApp (Sales/Enquiries): +65 8836 4489 (Regional HQ line)

• Email: admin@bestar.asia

• Website: www.bestar-hk.com

3. Recommended Specialists at Bestar

If you are reaching out, you may want to speak with their senior leadership or compliance officers who handle complex tax and corporate advisory:

Name	Role	Focus Areas
Roger Pay	Managing Director	Acquisitions, Restructuring, and Due Diligence.
Chris Wang	Country Manager (HK)	HK CPA and ACCA Fellow; specializes in tax compliance and retail/manufacturing sectors.
Kenny Ng	Audit Leader	Oversees the statutory audits required to support tax claims.

4. What to Prepare for Your First Consultation

To get the most out of a meeting with a Bestar specialist, have these details ready:

1. Business Nature: Are you trading, providing services, or holding intellectual property?

2. Physical Presence: Do you have any employees or a physical desk in Hong Kong?

3. Profit Source: Where exactly are your suppliers and customers located?

4. Transaction Flow: Where are the contracts physically signed?