Hong Kong Inland Revenue Department (IRD) enquiry letters are typically sent to owners of Hong Kong offshore limited companies following the submission of a Profits Tax Return to notify them that the IRD has chosen to formally investigate their tax affairs.
Although some enquiries are carried out randomly, the majority are selected based on a risk assessment of the business to obtain information and supporting documents to understand how a business operates and where its profits are generated.
While receiving an enquiry letter can be a concern for taxpayers, knowing how to effectively manage these inquiries can help ensure compliance and maintain the integrity of your business.
Hong Kong Offshore Profit Claims
Hong Kong’s corporate tax system is based on a territorial source principle: only those profits that arise in or are derived from Hong Kong are liable to Profits Tax in Hong Kong. This means that profits sourced outside Hong Kong qualify for 100% exemption in respect of Hong Kong Profits Tax.
This exemption is not automatically applied to a company’s profits. Instead, the company has to make an ‘offshore profits claim’ within three months from the date of issue of its Profits Tax return. Late applications can still be made within two years of the end of the relevant year of assessment, but the IRD may impose a penalty for late submission.
Source of profits is always a question of fact depending on the nature of the transaction. Companies should therefore maintain a complete chain of evidence with supporting documentation to substantiate a claim.
An offshore profits claim does not end when a tax return is filed. The IRD may request additional information.
According to IRD data, Profits Tax remains one of Hong Kong’s largest sources of tax revenue. In the 2025/26 tax year, it collected around HKD212.6 billion in Profits Tax, comprising about HKD205.3 billion from companies and a further HKD1.3 billion from unincorporated businesses.
If your documentation does not support an offshore profits claim, the financial impact can be significant: the disputed profits may be assessed as Hong Kong-sourced, with potential exposure to back tax, penalties and further IRD scrutiny.
While every review will be different, businesses are often surprised by the level of detail that the IRD will seek when examining an offshore profits claim to ensure that the profits are indeed sourced from outside Hong Kong.
This may include requests for supporting documents such as contracts, invoices and bank statements. The IRD may also conduct interviews with key company personnel to gather more information about its operations.
The IRD’s focus is generally not limited to where customers are located. Businesses may need to demonstrate where key commercial activities take place and how decisions are made within the organisation. Questions often arise around:
- Commercial decision-making.
- Customer and supplier relationships.
- Operational processes.
- Contract execution.
- Movement of goods and services.
- Supporting business records.
Many businesses believe that having overseas customers or generating revenue outside Hong Kong is sufficient to support an offshore Profits Tax position.
In practice, the source of profits analysis is often more nuanced. Following the introduction of the Foreign Source Income Exemption (FSIE) in 2023, certain offshore income may be subject to Hong Kong Profits Tax if the taxpayer is unable to satisfy the Economic Substance Requirements (ESR) in Hong Kong.
In other words, the IRD does not just determine tax liability based on the location of incorporation, the place where contracts are signed or how payments are routed. It will look to see how and where the underlying profit-generating activities are carried out.
If your company receives an enquiry letter from the IRD, it is essential to respond promptly and provide all the necessary information and documents requested. Failure to do so may result in the rejection of the offshore claim as well as potential penalties for non-compliance.
Businesses should therefore periodically review:
- Whether their operating model aligns with their tax position.
- Whether management activities are properly documented.
- Whether contracts, invoices and operational records support their position.
- Whether their business activities have changed over time.
Early preparation is generally more effective than trying to reconstruct evidence after an enquiry has started.
It is also worth noting that a successful offshore claim does not exempt a company from its accounting and audit requirements. Annual financial statements and an independent audit are required for all Hong Kong companies.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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