How do I make an offshore profits claim in Hong Kong

How Do I Make an Offshore Profits Claim in Hong Kong

To make an offshore profits claim in Hong Kong, you must satisfy the Inland Revenue Department (IRD) that the profits in question were derived from operations outside Hong Kong and are therefore not chargeable to profits tax under the territorial source principle. The claim is made by completing the relevant supplementary form and attaching it to your profits tax return (Form BIR51), together with a supporting statement based on Departmental Interpretation and Practice Note 21 (DIPN 21).

The Territorial Source Principle in Hong Kong

Hong Kong taxes only profits arising in or derived from Hong Kong. This territorial source principle is the foundation of every offshore profits claim. The IRD's guidance on the locality of profits is set out in DIPN 21. Whether a profit is sourced in Hong Kong depends on where the profit-generating activities took place, not on where the company is resident or where the contract is signed.

DIPN 21 Offshore Claim

DIPN 21 explains how the IRD determines the locality of different types of profit. For a trading company, the key question is where the contracts of purchase and sale were effected. For a service company, it is where the services were performed. For a manufacturing company, it is where the goods were produced. Read DIPN 21 to understand the specific tests that apply to your trade before preparing your claim.

The IRD Offshore Claim Form

The claim is made on the supplementary form that corresponds to your profit type. The most commonly used supplementary forms for offshore claims are S1 (trading), S2 (commission), S3 (manufacturing), and S4 (services). The form asks you to describe the nature of the business, the location of the profit-generating activities, and the basis for concluding that the profits are not sourced in Hong Kong.

How Do I Make an Offshore Profits Claim: The Process

The process for making an offshore profits claim follows these steps:

1. Prepare an offshore claim statement. This is a written analysis applying the tests in DIPN 21 to your business. It should identify the profit-generating activities by location, explain why they were performed outside Hong Kong, and state the percentage of profits claimed as offshore.

2. Complete the supplementary form. Select the correct form (S1 to S18) for your profit type and fill it in accurately.

3. Attach the claim to your profits tax return. When you file Form BIR51 for the relevant year of assessment, include the supplementary form and the supporting statement.

4. Submit evidence. The IRD will request documentary proof of where activities took place, such as purchase orders, contracts, invoices, shipping documents, bank statements, and correspondence showing the location of negotiations and decisions.

What Happens After You File the Claim

The IRD does not accept offshore claims without review. After receiving your return and supplementary form, the department will typically issue a letter requesting further information and evidence. Respond within the time allowed and provide a complete, consistent set of documents. If the IRD is satisfied that the profits are genuinely sourced outside Hong Kong, it will issue an assessment reflecting only the onshore portion as assessable profits. If not, it will reject the claim and issue an assessment charging profits tax on the full amount.

Practical Points for Advisers

• The basis period for the claim is the same as for your profits tax return, usually the 12 months ending on your accounting reference date.
• Provisional tax is computed on the assessable profits shown in the return, including any offshore amount. If the claim is later accepted, the provisional tax will be reduced or refunded.
• The block extension arrangements issued by the IRD allow tax representatives additional time to file returns. The deadline for filing the return with an offshore claim follows the timetable in the block extension letter.
• You can file the return and supplementary form through the Business Tax Portal or the Tax Representative Portal, provided you have registered as an electronic filer.
• A poorly prepared claim that does not properly apply DIPN 21 is likely to be rejected, and the IRD may then audit the company more closely in future years. Professional advice is strongly recommended.