Corporate Tax and Offshore Status Claim

Hong Kong offers many incentives to people who wish to incorporate a company in this mesmerizing city mainly because of its low tax regime and strategic geopolitical location – acting as the gateway to Mainland China which opens up to endless possibilities for commerce activities. This article mainly focuses on the tax benefits of incorporating a company in Hong Kong, how to claim offshore status as well as providing a guideline on what is considered a good audit report. We hope this article helps solidify your determination to open a company in Hong Kong after a thorough read!

Territorial Principle

Hong Kong adopts a territorial principle based on the matter-of-fact principle. According to the Inland Revenue Department (IRD), profit tax will only be charged to you only if your company derives its profits from Hong Kong. After a company is incorporated; the tax department will send out a profit tax return form to the company’s registered office address 18 months later. To claim 0% offshore status, one must provide proof that his or her company does not have any customers, employees, suppliers, or business operations in Hong Kong.

To show proof, you must provide supporting documents to your auditor for further review. Generally speaking, the documents would include the likes of bank statements, invoices, and expense receipts for the entire financial year. If your auditor finds that your company fits the criteria to claim 0% offshore status, he or she will simply state the fact on the audit report.

Audit Report

The IRD is usually lenient if it’s your first time filing for tax in which you will get an extra 2 months of grace period to submit the audit report along with the profit tax return form. Hence, you have a total of 3 months to prepare and submit everything before the deadline.

As briefly mentioned above, your auditor will ask you to provide supporting documents such as bank statements, expense receipts, and invoices from the entire financial year to ensure the consistency of the data provided.

It is extremely important you get a clean audit report before final submission or else there will be heavy consequences. Let’s say you submit an unclean audit report to the IRD, this will raise suspicions from the authority. A further background investigation will be conducted on you and your company. In the worst-case scenario, a hefty fine will be imposed, and court summons could occur. Additionally, please keep in mind that there are four types of auditor’s opinions. They are unqualified opinion, qualified opinion, disclaimer opinion, and adverse opinion. Feel free to check out our other article for further details if you wish to learn more about the topic.

We highly recommend you start gathering supporting documents at least 3 months before the IRD sends out the profit tax return form. For example, if the form will be sent out in around December 2024, we suggest you start sending supporting documents around September of the same year. You can gather your supporting documents in your computer folder and send it to us via Google Drive, Dropbox, or a zip folder.

Accounting Software

There are several accounting software available in the market, one of the most well-known brands is Xero. Beware that some company formation agencies will try to convince you to buy the software from them for a marked-up price way above the market value when you can directly purchase and download the software from their official website for a lower price.

The software can be simple to use as long as you have some basic knowledge of accounting as you can easily generate a management account (balance sheet, profit and loss report, and general ledger) from the software. However, we suggest you hire a professional accounting firm to handle your affairs if you do not have any knowledge of accounting whatsoever because the software itself can be a bit difficult to pick up.

Aside from company formation, we are also a professional accounting firm dedicated to helping our clients with tax filing, accounting as well as auditing. Our accounting fee is based on the total sales and total transaction number of your company for the entire financial year. The total sales are important because the higher total sales you have means the more the government will want to pay attention to your company if you intend to claim 0% offshore status. On the other hand, the total transaction number is also important because the more transactions you have means our accountant needs more time to book each transaction into the book which means more time costs.

If you are interested in incorporating a company or need accounting services in Hong Kong, please feel free to contact us by email at info@cheapincorp.com or WhatsApp at +852 5404 0902.