HK Offshore Profits Tax Claim: Steps, Costs & Evidence
Hong Kong applies the territorial source principle — only profits arising in or derived from Hong Kong are subject to profits tax, and qualifying profits can be claimed as exempt through an offshore claim at tax filing time. Before you start, get three things clear: the offshore exemption is not automatic, and there is no standalone application form — an offshore claim is raised through the profits tax return together with the auditor's report; the Inland Revenue Department (IRD) charges no application fee, so costs lie with audit and professional services; once approved, the exemption applies to that year of assessment and can continue in subsequent years until your operating model changes.
What Is the Offshore Exemption for a Hong Kong Company? Understand the Territorial Source Principle First
The core of Hong Kong's tax system is that the source of profits — not the place of incorporation or where the directors reside — determines whether profits are taxable. The official test follows Departmental Interpretation and Practice Notes No. 21 (DIPN 21): whether profits arise in or are derived from Hong Kong depends on where the actual operations that generated those profits were carried out.
Profits tax applies under a two-tier rates regime: corporations pay 8.25% on the first HK$2 million of assessable profits and 16.5% on the remainder; unincorporated businesses pay 7.5% and 15% respectively. Only one entity within a group may be nominated to benefit from the two-tier rates.
The Four Key Operations for Trading Profits (DIPN 21)
DIPN 21 sets out four key operations for determining the source of trading profits: soliciting orders, negotiating and concluding contracts, trade financing, and shipping and fulfilment. If any of these takes place in Hong Kong, the IRD may treat the related profits as taxable in Hong Kong. For example, if contracts are negotiated and signed overseas by local sales staff, with key decisions made outside Hong Kong, the profits may be regarded as offshore; but if directors finalise pricing and contract terms in Hong Kong, the IRD may conclude that the profits arise in Hong Kong.
The Application Process: 4 Steps From Start to Finish
Step 1 | Complete the Accounting and Audit (Prerequisite)
A newly incorporated company typically receives its first profits tax return (BIR51) about 18 months after incorporation; before then, accounts must be prepared and audited. The audit is a professional service performed by an external auditor/CPA and is a necessary precondition for raising an offshore claim.
Step 2 | Raise the Offshore Claim in the Tax Return + Auditor's Report
An offshore claim is not a separate application. When completing the profits tax return, the auditor sets out in the audit report the assertion — with supporting evidence — that the profits do not arise in or derive from Hong Kong.
Step 3 | Respond to the IRD Query Letter
After issuing an assessment, the IRD may send a query letter within a few months to a year requesting further evidence. The IRD publishes no processing timetable; actual progress depends on the case and any back-and-forth over supporting documents. Once a query letter arrives, you must respond within the stated deadline — a late response may lead the IRD to proceed directly to assessment.
Step 4 | Continue Using the Approval
Once approved, profits remain exempt for that year of assessment and subsequent years until the operating model changes — for example, if you start employing staff in Hong Kong, renting an office, or your supplier/customer structure shifts — at which point the IRD may issue further query letters.
Costs of an Offshore Claim: IRD Charges $0 — Here's Where the Money Goes
The IRD charges no application fee for an offshore claim. Real costs fall into two buckets: audit fees (depending on transaction volume and business complexity) and professional service fees. In the market, CPA firms offer offshore claim services from around US$250; this is a market quote range for reference only and is not a quote from this site — audit fees are charged separately.
What often costs far more is the price of rejection: back taxes plus possible penalties. Skimping on evidence preparation is a false economy.
What Evidence Does an IRD Query Letter Ask For? A Checklist
After a query letter is issued, the IRD typically asks for the following evidence to establish the source of profits:
- Sales and purchase contracts
- Invoices and receipts
- Bank statements
- Email correspondence with customers/suppliers
- Shipping/logistics documents (bills of lading, air waybills, etc.)
- Meeting minutes of directors and staff
- Directors' business travel records and passport copies
- Operations logs
This checklist maps to the four key operations in DIPN 21: the evidence must show that contract signing, negotiation, financing and shipping were all completed outside Hong Kong. Keep these records as you go rather than scrambling to assemble them after a query letter arrives — rushed submissions are a leading cause of rejected claims.
5 Common Reasons Offshore Claims Are Rejected (Cross-Border E-Commerce Sellers Take Note)
- Having an office, staff or warehouse in Hong Kong, or managing inventory and fulfilment from Hong Kong. If the operations genuinely take place in Hong Kong, report them honestly rather than forcing an offshore claim.
- Directors finalising pricing and contract terms in Hong Kong, locking the profits into Hong Kong. Meeting minutes for key commercial decisions and the place of signing should clearly record completion overseas.
- Only using a Hong Kong company to collect payment, with no records of overseas negotiation/signing. Collection is only one piece — complete records of business discussions conducted overseas must be preserved.
- Goods transiting through Hong Kong. Logistics arrangements should avoid using Hong Kong as a transit point; otherwise you must be able to show the trans-shipment was incidental.
- Using Hong Kong suppliers or customers. If profits genuinely derive from a Hong Kong supply chain, an offshore claim is hard to sustain.
Every case turns on its own facts — there is no one-size-fits-all answer, so assess your operating model early before filing.
Offshore Exemption vs FSIE: Don't Confuse Them
The two are different regimes, though they are often conflated in practice:
- Offshore exemption: applies to active business profits, asking whether the source of profits is in Hong Kong; available to all Hong Kong companies.
- FSIE (Foreign Source Income Exemption regime): applies to specified foreign income (interest, dividends, disposal gains, IP income) received in Hong Kong by members of multinational enterprise groups; it requires meeting the economic substance requirements under section 15K of the Inland Revenue Ordinance, and you can apply to the IRD for an advance ruling.
The IRD has stated clearly that FSIE's economic substance requirements do not affect the determination of the source of profits — the two paths are independent.
How Chan & Chung Can Help
Our scope of services on this site:
- Hong Kong company formation: handling everything from the company name search to submitting the incorporation application.
- Company secretarial and annual compliance coordination: coordinating statutory compliance matters such as annual filings and annual general meeting minutes.
- Advisory on cross-border tax, income sourcing and banking arrangements: strategic advice on tax and payment collection for the operating structures of cross-border e-commerce sellers and traders.
Audit and assurance services, CPA quotes and operating the IRD filing system fall within the scope of external professional services and are not services of this site. We can provide advisory opinions on compliance and tax strategy and help you communicate with your auditor about how to prepare your offshore claim.
Regulated trust or company services are provided by Intelligent Services Limited (TCSP TC010349), not by Chan & Chung.
If you have questions about Hong Kong company formation or tax planning for an offshore claim, contact us via our website.
FAQ
1. Do I need an audit before claiming the offshore exemption? Yes. The auditor's report is a prerequisite for raising an offshore claim; without an audit, you cannot claim the offshore exemption in the tax return.
2. How long does the application take and how long is it valid? The IRD publishes no processing timetable; timing depends on the case. Once approved, the exemption continues until the operating model changes — no annual re-application is required.
3. How much does the offshore exemption cost? The IRD charges nothing ($0). Costs lie in audit and professional service fees; market CPA services start from around US$250 (audit fees charged separately; for reference only).
4. Can Amazon / independent-site sellers apply? You can raise a claim, but warehouse location, where decisions are made and payment flows are the focus of review. Amazon and similar third-party platforms are unrelated to our services.
5. What's the difference between the offshore exemption and FSIE? The former looks at the source of profits (active business profits); the latter targets specified foreign passive income (interest, dividends, etc.) of multinational groups. The two paths are independent.
6. What happens if the claim is rejected? Back taxes plus possible penalties. Review the operational facts first, then decide whether to respond to the query letter or adjust the operating model.