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The EU tax reform storm! VAT costs for mainland enterprises have soared by 300%! Could Hong Kong com
2025.09.26
I. Basic Understanding: The Core Logic and Compliance Boundaries of Offshore Exemptions
1. Definition and legal basis: It is not "tax avoidance", but a legal right.
Hong Kong implements the "territorial source taxation principle". This principle is clearly stipulated in Article 14 of the "Hong Kong Taxation Ordinance": Only "profits generated or derived in Hong Kong" are subject to capital gains tax, while "profits that are entirely derived from outside Hong Kong" are not taxed. And "offshore exemption" is the legal process through which enterprises submit evidence to the Hong Kong Inland Revenue Department, proving that their profits meet the "entirely foreign source" standard, and after approval, they are exempt from capital gains tax.
Please note in particular: The current Hong Kong Capital Gains Tax rate is "The first 200,000 Hong Kong dollars of profits are taxed at 8.25%, and the portion exceeding 200,000 Hong Kong dollars is taxed at 16.5%". After the offshore exemption application is approved, the corresponding profits can be fully exempted from this tax, not "reducing the tax rate" or "delaying tax payment", but a legitimate tax exemption based on the taxation principle.
2. Key Distinction: Offshore Exemption ≠ Zero Declaration. Misuse Has Severe Consequences
Businesses often confuse "offshore exemption" with "zero declaration". These two concepts have fundamental differences in terms of applicable scenarios, material requirements, and compliance risks. Misuse of either could trigger a 7-year tax追溯by the tax authority (for specific differences, see the table below)：
It is particularly important to note that by 2025, Hong Kong has completely abolished the era of "zero audit and zero declaration". Even if a company has no actual operations at all, it must first obtain a "Zero Operations Audit Report" from a Hong Kong licensed accountant to prove the "zero business, zero transactions, zero assets" status, and then submit it along with the profit tax form - "The audit report is the legal proof of zero declaration", and "missing the audit process and submitting an empty form for declaration" is already an illegal act.
The offshore exemption is applicable to enterprises that "have actual operations but generate profits outside the country". In addition to the regular audit, a "special analysis of offshore profits" is required. The complexity of the audit and the evidence requirements are much higher than those for zero declaration, but after compliance is achieved, it can achieve legal tax exemption; zero declaration is only applicable to "companies that have not opened at all", has no actual tax-saving value, and is only used to maintain tax compliance status.
3. Core of the New Regulation: FSIE 2.0 and the "Four-Step Testing Method"
In 2025, the offshore exemption application will need to focus on two policy adjustments, which are the key factors determining the success or failure of the application:
The detailed requirements of the "Foreign Income Exemption from Taxation Mechanism (FSIE 2.0)": The FSIE 2.0, which came into effect in January 2024, further clarified the "economic substance standard" in 2025 - If an enterprise applies for an offshore exemption for "passive income (dividends, interest, intellectual property licensing fees)", it must prove that the overseas entity generating such income has an "actual operation team" (not a shell company), and must provide materials such as overseas employee social security records, office space certificates, etc.
The "Four-Step Testing Method" of the Tax Bureau has been officially implemented: Starting from March 2025, the tax bureau will determine the source of profits through a four-step process of "counterparty verification → operational trajectory verification → core behavior verification → substantive existence verification". If any step is not met, the application will be directly rejected, and the enterprise will be required to provide "digital evidence" to support the compliance of each step.
II. Latest Offshore Exemption Application: 5 Core Conditions + Digital Evidence Requirements
In 2025, the tax bureau's verification of "substantive operation" will no longer be limited to "surface materials", but will delve into the entire business chain. Enterprises must simultaneously meet the following 5 conditions, and each condition must be accompanied by "digital evidence", which is indispensable:
1. The counterparty has no connection with Hong Kong.
Neither the customers nor the suppliers are allowed to be enterprises registered in Hong Kong or permanent residents of Hong Kong.It is necessary to provide the other party's "Overseas Company Registration Certificate" and "Lease Contract for Overseas Office Address" (which must be notarized by a local notary office).
New requirement for 2025: A "Non-Hong Kong Business Statement" from the client/supplier must be submitted, clearly indicating that their business activities have no connection with Hong Kong.
2. The supply chain and service chain will not pass through Hong Kong throughout the process.
Trade-related enterprises: The goods should be directly delivered from the mainland (such as Shenzhen Port, Ningbo Port) or overseas ports to the end customers. The bills of lading and customs declaration forms must clearly indicate "Port of Origin ≠ Hong Kong" and "Port of Destination ≠ Hong Kong". Storage and transshipment through Hong Kong are prohibited. Logistical records that need to be submitted for blockchain verification (such as screenshots from Cainiao International and Maersk Blockchain System) must be provided. Paper documents must be accompanied by a written statement stating "No Hong Kong Transit" and must be stamped by the logistics company.
Service-oriented enterprises: If the entire service delivery process is completed overseas (such as providing IT maintenance services remotely to European customers), they must provide "service trace evidence" - including the IP addresses of the service personnel (which should be either domestic or overseas IPs, and can be verified through tools like IP2Location), service progress reports (indicating the service location), and customer confirmation letters (stating that the service was not conducted in Hong Kong).
3. Core decisions and contract signing are conducted overseas.
The meeting place for the board of directors' resolutions and the signing locations of major business contracts (such as purchase contracts and sales contracts) must be outside Hong Kong.
For electronic signing, "double verification" is required: the physical location of the server used for signing (such as the proof of the server in the mainland of Alibaba Cloud), and the IP login log during the signing process (which should include time and location information);
Prohibited circumstances: Board meetings are held in Hong Kong, contracts are printed or signed in Hong Kong (even if the signatories are from overseas entities).
4. No trace of operational activities in Hong Kong
The enterprise is not allowed to set up an office in Hong Kong (legally using the registered address provided by the secretarial company), nor is it permitted to employ full-time or part-time staff in Hong Kong.
A "foreign operation certificate" is required: lease contract for the office space in the mainland or abroad (with a lease term of ≥ 1 year), employee social security payment records (issued by social security institutions in the mainland or abroad), and real photos of the office premises (including the address plate number and the company logo).
Supplementary requirements for 2025: If an enterprise has a director who is a Hong Kong citizen, it is required to provide the "abroad residence certificate" of that director (such as a mainland residence permit or an overseas rental contract), to prove that their main place of living and work is not in Hong Kong.
5. The flow of funds is clear and has no connection with Hong Kong.
The enterprise's receipts and payments must be made through an overseas bank account, or by using a bank account in Hong Kong (but it is necessary to prove that the funds originate from outside the country).
The complete bank statement (with the "overseas income" details noted) and the SWIFT message (proving that the fund settlement path does not pass through the local clearing system in Hong Kong) must be submitted.
Prohibited circumstances: Receiving funds from Hong Kong customers using Hong Kong accounts, and frequent transfer of funds between Hong Kong accounts and local Hong Kong enterprise accounts.
III. Full Process of Offshore Exemption Application: Divided into 3 stages (with a 9-month cycle)
In 2025, the Hong Kong Inland Revenue Department will implement the "phased material submission" model. Compared to the traditional process (which takes 18 months), proper planning can shorten the approval cycle to 9 months. The specific process breakdown is as follows:
Phase 1: Preparation Period: Compliance Self-Check + Evidence Chain Establishment
The preparation period lasts for 1-2 months. This is the foundation for a successful application. The key point is to "prepare the materials according to the verification logic of the tax bureau":
Qualification pre-assessment: Conduct self-check using the "four-step test method" of the tax bureau, with the focus on verifying: the proportion of Hong Kong entities in business contracts in the past 3 years (it must be 0%), whether there are records of Hong Kong transshipment in logistics documents, and whether there is written proof of the core decision-making location.
Evidence collection: Organize the materials into three categories: "Business", "Finance", and "Operations". In 2025, a special focus should be placed on supplementing "Digital Evidence" (the detailed list is provided in the table below):
Preparation of offshore special audit report: Entrust a licensed Hong Kong accountant (who needs to be registered with the Hong Kong Institute of Certified Public Accountants) to issue a "Special Offshore Audit Report". The report should separately list: offshore profit amount and proportion, analysis of profit source, special statement indicating compliance with offshore exemption conditions - Ordinary audit reports cannot be used for exemption applications and need to be redone, the cost is approximately 15,000 - 30,000 Hong Kong dollars depending on the size of the enterprise's profit.
Phase Two: Application Period - Submission of Materials + Response to Queries
Submission of basic materials (Month 1): Submit three types of core materials to the Hong Kong Tax Bureau:
Profit Tax Return (BIR60): In the "Source of Profits" column, select "Offshore Income", and briefly describe the location of the profit source;
Offshore exemption application form (FORM IR1314A): All necessary information regarding the enterprise's basic details, business model, and profit composition must be accurately filled out.
Supporting materials: Offshore special audit report + 1000-word "Business Explanation Letter" (structurally elaborating on "Why the profit has nothing to do with Hong Kong", avoiding ambiguous expressions);
Tax Bureau Inquiry Response (Months 2-5): In 2025, the tax bureau will typically issue 2-3 rounds of inquiry letters, mainly focusing on "business substance" and "evidence completeness". Professional responses must be provided within the stipulated time frame (usually 14-30 days).
Focus of Inquiry 1: Business Relevance (e.g.: Why choose to sign the contract abroad?) requires supporting documents from the signing location (such as office lease agreement, IP log);
Focus of Inquiry 2: For evidence supplementation (e.g., missing blockchain logistics records for a certain quarter), contact the logistics provider to obtain the storage link and provide a written explanation;
Focus of Inquiry 3: Rationality of Funds (e.g., source of funds for receipts from Hong Kong accounts) requires providing the corresponding customer's overseas registration certificate and SWIFT message to prove that the funds originated from abroad.
Phase 3: Result Period: Result processing + Follow-up maintenance
Approval results and responses:
Fully approved: Received the "Offshore Profits Tax Exemption Confirmation Letter" from the tax bureau. It is necessary to archive this letter (which needs to be provided during the tax bureau's review). The profits for this year are exempt from income tax.
Partially approved: Only overseas profits are exempted from tax, while profits in Hong Kong need to be taxed at the applicable rate - The calculation logic for "profits in Hong Kong" as determined by the tax authority needs to be verified. If there are any objections, a review application can be submitted within 30 days.
Full rejection: Full tax refund is required + Fine payment (5%-15% of the outstanding tax amount will be imposed; an additional 20% will be imposed if the overdue period exceeds 12 months). New evidence can be submitted within 6 months to apply for reconsideration.
Subsequent maintenance requirements: The tax bureau has a 3-5 year review period for approved enterprises (the review rate will be raised to 40% in 2025), and enterprises are required to:
Update the offshore evidence package annually (such as adding new overseas office lease agreements and employee social security records);
Before any major changes occur in the business (such as adding new customer groups or adjusting logistics routes), conduct a tax compliance assessment first.
All exemption materials shall be retained for 7 years (in compliance with the archive retention requirements of the Hong Kong Taxation Ordinance).
IV. Three Common Misconceptions about Offshore Exemptions in 2025: Avoiding Compliance Risks
1. Misconception 1: "Having Hong Kong-based part-time employees does not affect the application."
The tax bureau has clearly stated: "Whether it is full-time or part-time employment, as long as local Hong Kong personnel are hired, it is regarded as having operational traces in Hong Kong." Even a part-time accountant who works only one day per month will be considered a reason for rejection, and may be deemed to have "concealed operational facts" and face fines.Correct approach: All employees work abroad. If local services in Hong Kong are required (such as tax consultation), these services should be handled by a third-party agency (such as a secretarial company) instead of directly employing Hong Kong personnel.
2. Misconception 2: "After the application is approved, the business model can be freely adjusted."
Some enterprises believe that "once the offshore exemption is approved, there is no need to go through the process again", and they may add new Hong Kong customers or adjust logistics routes (such as through Hong Kong for transshipment) - In 2025, there were cases where a certain enterprise was penalized by the tax authority for not declaring the new Hong Kong customers, and was required to pay back taxes for the past 3 years plus fines exceeding 1 million Hong Kong dollars.
The correct approach: Before adjusting the business model, communicate with professional institutions first to assess whether it will affect the exemption qualification; if the new business involves Hong Kong connections, it should be operated by a mainland company separately to avoid confusion with offshore business.
3. Misconception 3: "Digital evidence can be supplemented later"
In 2025, the tax bureau will have strict requirements for the timeliness of "digital evidence". For instance, blockchain logistics records and IP logs must be the original evidence at the time of the business occurrence. Any evidence added later will be regarded as "invalid".
The correct approach: During the business operation process, digital evidence should be retained simultaneously. For example, IP logs should be saved immediately after electronic signing, and blockchain verification should be obtained promptly after the logistics process is completed to avoid any omissions in the later stage.
V. Value of Secretarial Company Services: Enhances Approval Rate and Reduces Compliance Risks
The core difficulties in applying for offshore exemption lie in "inadequate understanding of policies", "incomplete evidence preparation", and "unprofessional responses to inquiries". As a licensed secretarial company, our services can specifically address these issues. In 2025, the pass rate for handling offshore exemption applications through our agency reached 82%, far exceeding the industry average of 42% (data sourced from the Hong Kong Institute of Certified Public Accountants' 2025 Mid-Year Report):
1. Initial stage: Free pre-assessment + Risk screening
Use the "four-step testing method" of the tax bureau to conduct a simulation review, clearly informing the enterprise "which conditions are not met" and "which business processes need to be adjusted" (such as changing the Hong Kong signing to a mainland signing).
Provide the "2025 Offshore Exemption Evidence Checklist Template", marking "Digital Evidence Acquisition Path" (such as the application process for blockchain logistics records), to prevent enterprises from missing out on key materials.
2. Mid-term: Audit + Application + Inquiry Comprehensive Handling
Connect with licensed CPAs in Hong Kong (who are all registered with the Hong Kong Institute of Certified Public Accountants), ensure that the offshore special audit reports meet the requirements of the tax authority, and the pass rate is 25% higher than that of enterprises choosing their own agencies.
Optimize the presentation format of the materials according to the preferences of the tax bureau (for example, converting the "Business Explanation Letter" into a structured table) to enhance efficiency;
A professional team prepares the response to inquiries (with an average of 8 years of experience and familiar with the tax authority's review logic), and the response approval rate in 2025 exceeded 90%, avoiding rejection due to improper expression.
3. Post-implementation: Review and maintenance + Business alerts
Every year, remind enterprises to update their evidence packages. Conduct a mock review 3 months in advance of the actual review date, and complete any missing materials.
Provide compliance advice before the business change to avoid losing the exemption qualification due to "unintentional violations".
Keep the relevant materials for the long-term exemption of the enterprise, ensuring compliance with the 7-year archive retention requirements.
The core logic of the Hong Kong offshore exemption in 2025 has shifted from "completeness of materials" to "substantive compliance". Enterprises need to abandon the "侥幸 mentality" and focus on "the essence of the business + digital evidence" as the core for preparing their applications. As a licensed institution deeply involved in Hong Kong business services， we always prioritize "compliance" and help enterprises clearly understand the key points of the policies and efficiently complete the offshore exemption applications. If you want to know more， please scan the following image to add our WeChat and contact us.
Compliance is the prerequisite for saving taxes, and professionalism is the key to success.
