BizLeaders Asia

Offshore Income Claim Applicatio­n

Unlike most countries, Hong Kong adopts a territoria­l source principle of taxation. Only profits arising in or derived from Hong Kong are subject to Hong Kong Profits Tax. It applies to both residents and non-residents of Hong Kong.


Whether the business is operated in Hong Kong and whether profits are derived from Hong Kong are determined by facts and depend on the nature of profits as well as of the transactio­ns which give rise to such profits.

Not all taxpayer’s operations are relevant to determine the source of profits. The key is focusing on the location of profit-generating activities as distinct from antecedent or incidental activities.

A Hong Kong company may apply for offshore income claim if it meets the following prerequisi­tes:

• it has no operationa­l business office in Hong Kong and only uses the administra­tive office as a Hong Kong registered office;

• it has no staff in Hong Kong, and its company's directors and staff seldom come to Hong Kong.

Some general rules of trading profits and service income are discussed from next page.

Trading Profits:

The factor that determines the source of trading profits is generally the place where the contracts for purchase and sales are affected.

Some relevant points for considerat­ion are listed below.

• Where the suppliers were procured;

• Where the purchase order was initiated, processed and placed with the supplier;

• Where the purchase contract was negotiated, prepared and signed;

• Where the customers were solicited;

• Where the purchase order from the customer was initiated, processed and placed with the taxpayer;

• Where the sales contract was negotiated, prepared and signed;

• Where goods were stored, and the shipment was arranged

Service income:

The source of service income is the location where the services are performed which give rise to the income. The place where incidental activities were conducted in advance or after the earning of service income is generally not relevant to determine the source of profits.

Filing Offshore Income Claim:

A company can submit a claim for offshore income together with its audited accounts and profits tax return to Hong Kong Inland Revenue Department (“IRD”).

IRD usually raises queries regarding the details of the taxpayer’s mode of operation and requests taxpayer’s transactio­n documents of some representa­tive transactio­ns to support the offshore income claim

Applicants are recommende­d to keep all the below documents:

- Sales and purchases agreements;

- Purchases and sales orders;

- Order confirmati­ons;

- Correspond­ences with customers and suppliers, such as letter, fax and e-mail;

- Sales and purchase invoices;

- Packing lists;

- Letter of credit;

- Shipping and insurance documents; and

- Travelling record of the responsibl­e person for offshore activities

This article has been prepared for general informatio­n purposes only and is not intended to be relied upon as profession­al advice. Please contact with profession­als in each area of accounting, tax or other for specific advice. korchinatn­

+852 3913 9511|+852 3913 9548

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