Profit Tax for Offshore Hong Kong Companies
We have been asked a few times about whether a Hong Kong company needs to pay profit tax if its income is not derived in Hong Kong.
Legally, a Hong Kong company does not have to pay tax for the profit derived outside of Hong Kong. However, it can only claim the “offshore status” after its book being audited. In addition, the director of the company will need to answer pages of questions presented by the Inland Revenue Department. Therefore, we do not advise anyone to count on the “offshore status”. One should consider to form a BVI company instead of a Hong Kong company if he wants to avoid tax. However, BVI companies are less reputable and acceptable than Hong Kong companies are. In fact, we have heard that someone who already had a BVI company eventually formed a Hong Kong company because the United Nations does not do business with BVI companies.
However, if a Hong Kong company does not conduct business, that is, if it does not sign contract or issue invoice, and if it only receives and makes payments, it may not need to do accounting, auditing and pay tax. Some of our mainland Chinese clients who already own other Chinese companies. They form Hong Kong companies simply because they want to use the companies as holding companies, ie, to make and receive payments only. They usually claim the companies as “not in commerce” on the tax forms and skip the accounting and auditing. While many people are doing that, however, such practice falls in the gray area of the law.
References:
- http://www.ird.gov.hk/eng/paf/bus_pft_tsp.htm
- Section 14, the Inland Revenue Ordinance: http://www.legislation.gov.hk/eng/home.htm
- http://www.ird.gov.hk/eng/ppr/advance34.htm
- http://www.ird.gov.hk/eng/ppr/advance35.htm
- http://www.ird.gov.hk/eng/tax/stc.htm