Taxation for Companies Incorporated Outside
Q1. Is an offshore
company, i.e. one incorporated outside Hong Kong, liable to
pay Hong Kong profits tax?
A1. The Inland Revenue Ordinance (“IRO”) contains
no exemption from profits tax for offshore companies. Whether
an offshore company is liable to profits tax depends on the
nature and extent of its activities in Hong Kong.
Q2. Under what circumstances
is an offshore company liable to profits tax?
A2. Generally speaking, a company is liable to profits tax
if it carries on a trade, profession or business in Hong Kong
and has profits arising in or derived from Hong Kong from
such trade, profession or business. This applies equally to
Hong Kong companies and those incorporated overseas.
Q3. How does the IRD
decide whether a company is carrying on a business in Hong
A3. This is a question of fact and has to be decided by reference
to the circumstances of each case. It should, however, be
noted that a company needs not have extensive activities in
Hong Kong before it is considered to be carrying on a business
here. Furthermore, the activities of a company’s agents
in Hong Kong may also be relevant.
Q4. How does the IRD
decide whether a company’s profits arise in or are derived
from Hong Kong?
A4. Again this is a question of fact. The general guideline
is to ascertain the operations of the company that give rise
to the profits and the places where such operations are carried
out. Further details of the IRD’s views on the determination
of the territorial source of profits are contained in Departmental
Interpretation and Practice Note (“DIPN”) No.
21: Locality of Profits, which can be downloaded from the
IRD’s website at http://www.ird.gov.hk/eng/pdf/e_dipn21.pdf.
Q5. What are the reporting
requirements for an offshore company carrying on a business
in Hong Kong?
A5. An offshore company carrying on a business in Hong Kong
is subject to the same reporting requirements as a Hong Kong
company. The basic requirements are that the company has to
register its business with the Business Registration Office
of the IRD and to furnish profits tax returns issued to it.
If the company has profits chargeable to tax for any year
of assessment but has not received any return from the IRD,
it has to inform the IRD in writing of its liability within
4 months after the end of the basis period for that year of
Furthermore, the company is required to keep sufficient records
(in English or Chinese) to enable its assessable profits to
be readily ascertained and the records must be retained for
at least seven years after the completion of the relevant
Q6. Is it necessary
for an offshore company to submit audited accounts when it
files its profits tax return?
A6. Where the company is incorporated in a jurisdiction whose
laws do not require accounts to be audited and no audit has
been performed on the company’s accounts, the IRD would
accept unaudited accounts filed in support of the return.
However, if an audit has actually been carried out notwithstanding
that there was no such requirement under the laws of the relevant
jurisdiction, the audited accounts should be submitted with
Where an offshore company’s head office is outside Hong
Kong but it has a branch in Hong Kong, the IRD is generally
prepared to accept unaudited branch accounts without the cover
of audited world-wide accounts. However, the assessor may
request a copy of the audited world-wide accounts if circumstances
Q7. My company has
made some royalty payments to an offshore company which as
far as I know does not carry on any business in Hong Kong.
Is the royalty income of the offshore company chargeable to
A7. Even if the offshore company does not carry on any business
in Hong Kong, the royalties it received are nevertheless chargeable
to profits tax if they are:
(a) payments received from the exhibition or use in Hong Kong
of cinematograph or television film or tape, any sound recording,
or any advertising materials connected with such film, tape,
or recording; or
(b) payments received for the use of or right to use in Hong
Kong any patent, design, trademark, copyright material or
secret process or formula or other property of a similar nature,
or for imparting or undertaking to impart knowledge connected
with the use in Hong Kong of any such patent, design, etc;
(c) payments received for the use of or right to use outside
Hong Kong any patent, design, trademark, copyright material
or secret process or formula or other property of a similar
nature, or for imparting or undertaking to impart knowledge
connected with the use outside Hong Kong of any such patent,
design, etc, which are deductible in ascertaining the assessable
profits of a person under Profits Tax (not applicable to sums
received or accrued before 25 June 2004).
In the above situation, the assessable profits are taken to
be 30% of the payments (or 10%, if the payments were received
by or accrued to the offshore company before 1 April 2003)
but may be taken to be 100% of the payments if the offshore
company is your company’s associate. The tax payable
is then computed by applying the appropriate tax rate to the
assessable profits so arrived at. Furthermore, the offshore
company is chargeable in your company’s name and your
company is required under the IRO to withhold from the payments
made to the offshore company sufficient money for the payment
of the tax.
Q8. Are there any tax
rules that are specifically relevant to offshore companies?
A8. Basically, offshore companies and Hong Kong companies
are treated in the same way. However, if a company is a non-resident,
the following should be noted:
(a) A non-resident is chargeable to tax either directly or
in the name of his agent in respect of his Hong Kong sourced
profits from a trade, profession or business carried on in
Hong Kong. The tax may be recovered out of the assets of the
non-resident or from the agent and the agent is required to
retain from the non-resident’s assets sufficient money
to pay the tax.
(b) A non-resident receiving royalty income as described in
the answer to question 7 is subject to profits tax in the
way explained therein.
(c) A local person (including a company) who sells goods in
Hong Kong on behalf of a non-resident shall furnish quarterly
returns to the IRD showing the gross proceeds from the sales
and at the same time pay to the IRD a sum equal to 1% of the
sales proceeds, or such lesser sum as may have been agreed
by the IRD.
(d) Where a non-resident carries on business with a closely-connected
resident person and the business is so arranged that it produces
to the resident person either no profits or less than the
ordinary profits, the business may be deemed to be carried
on in Hong Kong by the non-resident through the resident person
as his agent.
(e) Where a non-resident receives sums directly or indirectly
from the performance in Hong Kong by a non-resident entertainer
or sportsman, special procedures of assessment and collection
of tax would apply.
It should however be noted that whether a company is a non-resident
is largely a question of fact and that not every offshore
company is regarded as a non-resident.
Q9. How can an offshore
company be more certain about whether its activities will
give rise to profits tax liability?
A9. The company may consider applying, on payment of an appropriate
fee, for an advance ruling under section 88A of the IRO in
respect of a contemplated transaction or arrangement.
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