Hong Kong charges profits tax on profits “arising in or derived from Hong Kong,” and the Inland Revenue Department (IRD) states that residence makes no difference. A company incorporated locally can therefore hold profits that fall outside the tax net, but the outcome depends on what the business does and where it does it.
The test the IRD applies
The IRD’s Departmental Interpretation and Practice Note No. 21 sets out a broad guiding principle: “one looks to see what the taxpayer has done to earn the profit in question and where he has done it.” The note adds that each case depends on its own facts and that no single legal test covers every situation.
“Offshore” is a label for this outcome. Every Hong Kong company is incorporated the same way, and the label describes how a particular stream of profit is sourced.
How the starting point differs by activity
The practice note gives different starting points for different kinds of income:
| Activity | IRD starting point |
| Trading | Both purchase and sale contracts made in Hong Kong: fully taxable. Both made outside Hong Kong: no part taxable. Only one made in Hong Kong: starting presumption of full taxability, subject to further examination |
| Manufacturing | Goods made in Hong Kong: fully taxable, even if sales staff are overseas. Cross-border manufacturing, such as in Mainland China: may be apportioned, and contract processing is typically treated on a 50:50 basis |
| Services | Sourced where the services are performed; services done partly in and partly outside Hong Kong may be apportioned |
The IRD describes trading profits as “either wholly taxable or wholly non-taxable,” so apportionment generally does not apply to them. It also looks beyond the contract location to other operations, such as order solicitation, shipment and financing.
A trading illustration
Take a company that buys goods from a supplier in Vietnam and sells them to a buyer in Germany. If both contracts are concluded outside Hong Kong, the table above points to no taxable profit, provided the documents support it. If the sale contract is signed in Hong Kong, the starting presumption becomes full taxability and the company has to argue the point.
What rate applies to profits that are taxable
Taxable profits of a corporation are charged at 16.5%. Under the two-tiered system, eligible corporations pay 8.25% on the first HK$2 million of assessable profits and 16.5% on the rest, according to the IRD.
On HK$3 million of assessable profits, that works out as follows:
- First HK165,000
- Remaining HK165,000
- Total: HK$330,000
The evidence the IRD expects
The practice note says taxpayers should be ready to prove in their returns, with supporting documentary evidence, that profit was earned outside Hong Kong. Two examples from the note:
- Where staff concluded contracts overseas, the IRD asks for travel, hotel and subsistence costs for each transaction.
- Where overseas agents were involved, it looks for agency agreements or other evidence supporting the claim.
A file built transaction by transaction as the business operates answers these requests directly.
Foreign-sourced passive income
The foreign-sourced income exemption (FSIE) regime has applied since 1 January 2023. It covers four types of income: interest, dividends, disposal gains from equity interests and intellectual property income, when they accrue to a multinational enterprise entity carrying on business in Hong Kong. Such income is treated as taxable when received in Hong Kong, and an entity that meets the specific exception for a type of income stays exempt on it, per the IRD brief guide. Trading and service income follow the sourcing rules above, and these four income types follow the FSIE rules.
Setting up the company
The Hong Kong Trade Development Council (HKTDC) lists the practical requirements:
| Item | Requirement |
| Directors | At least one must be a natural person; residency in Hong Kong is not required |
| Share capital | No minimum; HK$1,000 is common practice |
| Registered office | A physical address in Hong Kong; P.O. Box addresses are not accepted |
| Forms | Incorporation Form (NNC1), Articles of Association and the IRBR1 notice to the Business Registration Office |
| Timing | About 4 working days for the Companies Registry to issue the Certificate of Incorporation; a business registration certificate usually follows within 2 working days |
Founders researching hong kong offshore company formation will find the incorporation steps are the short part of the process. The longer part is deciding, before the first contract is signed, which operations take place where, and keeping records that match.
After incorporation
The year of assessment ends on 31 March. Corporations file a Profits Tax Return, and a person chargeable who has not received a return form must inform the Commissioner in writing within four months after the end of the basis period. Business records must be kept for at least seven years under section 51C of the Inland Revenue Ordinance.
A practical checklist
Before the first transaction, a founder can map each revenue stream to one of the three rows in the table and note where the contract is concluded, where the work is done and who performs it. Writing that down at the start gives the company a baseline against which each year’s facts can be checked.
What to keep in mind
The IRD’s own materials treat sourcing as a question of fact for each stream of profit. A company with trading income, service income and dividends can end up with three different answers in one year. Professional advice on the facts of the specific business is the sensible next step before filing.