Hong Kong has long been a favorite jurisdiction for international entrepreneurs, consultants, and trading companies due to its low tax rate and territorial tax system. However, recent developments in tax enforcement and compliance policies have changed the game.

Contrary to common belief, having no clients or business in Hong Kong does not automatically exempt a company from taxation — and yes, audited financial statements remain mandatory for all active Hong Kong companies.

Key Update: Offshore Income May Be Taxed in Hong Kong

In response to global pressure from the OECD and EU, Hong Kong has tightened its interpretation and application of the "territorial source principle" — especially under the Foreign-Sourced Income Exemption (FSIE) regime, which came into effect in January 2023 and was updated further in 2024–2025.

What This Means:

• Passive income such as dividends, interest, royalties, and capital gains from offshore may be subject to Hong Kong tax if they are received in Hong Kong by a multinational enterprise (MNE).

• Pure offshore claims now face greater scrutiny by the Inland Revenue Department (IRD).

• Companies must substantiate offshore claims with real documentation — invoices, contracts, bank statements, and more.

• Group structures using Hong Kong entities for holding or IP must reconsider their tax exposure.

All Hong Kong Companies Must File Audited Accounts

Whether your Hong Kong company is actively trading or simply holding foreign investments, it must:

• Prepare annual audited financial statements

• Submit Profits Tax Returns (PTR)

• Keep records for at least 7 years

Even for “Offshore” Companies?

Yes. Even if a company applies for an offshore tax exemption, it still needs to submit audited financials to support its position. Without these documents, your offshore claim is likely to be rejected.

✅ Tip: Hire a certified Hong Kong CPA familiar with offshore tax files and FSIE rules - at Zitadelle AG we can assist with Hong Kong audit procedures.

Common Myths – Busted

Myths:

“I have no clients in Hong Kong, so no tax.”

“I don’t need an audit if I don’t pay tax".

“Setting up a dormant HK company is enough.”

"I can handle this without a local accountant.”

Reality -

If funds are remitted to a Hong Kong bank or used by an HK office, tax may apply.

All active HK companies must be audited, even if offshore.

Dormant status requires formal IRD approval and zero transactions.

The IRD expects CPA-prepared documents, especially for offshore claims.

What Is the FSIE Regime?

The Foreign-Sourced Income Exemption (FSIE) regime targets MNEs using low-tax jurisdictions. Under this rule:

• Four types of offshore passive income (dividends, interest, IP income, and gains from share sales) may be taxed if:

  • The company has significant economic presence in Hong Kong, or

  • The income is received in or used within Hong Kong.

This regime aligns Hong Kong with global BEPS 2.0 standards, reinforcing its international reputation while reducing abuse.

Who Is Affected?

If you own or operate a Hong Kong Private Limited Company, you are affected if:

• You receive overseas income into a Hong Kong bank account

• You are part of an MNE group (annual revenue over HKD 50 million)

• You claim an offshore exemption for profits or investments

Compliance Checklist for 2025

• Annual audit by HK CPA- Yes

• Profits Tax Return filing- Yes

• Offshore income claim support- Yes

• FSIE documentation (if applicable)-Yes

• Dormant status declaration (if applicable)- Yes (if 0 activity)

What You Should Do Next

1. Assess your structure – Are you receiving income outside Hong Kong but routing it through HK?

2. Engage a CPA – Work with a qualified tax professional familiar with FSIE rules and offshore audits.

3. Prepare documents – Contracts, bank records, service agreements, emails - all may be needed to support your offshore claims.

4. Don’t ignore audits – Every active HK company needs one. Penalties for non-compliance can be severe.

💬 Talk to Experts: Hong Kong Tax & Audit Advisory

At Zitadelle AG, we specialize in helping businesses:

• Navigate the FSIE regime

• Prepare compliant Hong Kong audits

• Optimize corporate structures with real substance

• File offshore profits tax exemption applications properly

Contact Us At Zitadelle AG Today via the Contact Us form for more information,