Tax exemptions for foreign-sourced income have been a hot topic recently. The tax exemption for foreign-sourced income was introduced in 2009 and it is an effective way to minimize the impact of double taxation. In this article, we will discuss the tax exemption for foreign-sourced income in Hong Kong and how it works. Read on to gain a better understanding of this complex issue.
What is the tax exemption for foreign-sourced income?
Foreign income refers to any income generated from a country other than the one where the taxpayer resides. However, if the taxpayer is able to show that the foreign-sourced income was already taxed overseas, they may be eligible for a full or partial exemption from HK tax.
Most countries in the world have a tax system that collects taxes on income and capital gains, and levies taxes on goods and services consumed by residents. These taxes are paid to respective national governments.
However, not all countries impose tax on all types of income. In some cases, only income from within the country is taxed while income from abroad is exempted. Hong Kong is one such country where foreign sourced income may be exempt from taxation in order to encourage trade and investment with other countries.
In Hong Kong, the Inland Revenue Ordinance (IRO) provides for a general tax exemption for foreign-sourced income. If you are a resident of Hong Kong and have received income from overseas, it does not need to be included in your assessable income, unless it is remitted into Hong Kong. However, if your overseas income has been remitted into Hong Kong then the tax authorities will treat that as taxable income.
A person can be classified as a tax resident of Hong Kong if they stay in the territory for 180 days or more in any 12 consecutive months.
If you are not a Hong Kong tax resident, then your foreign-sourced income will likely be filed on your home country’s individual income tax return.
Foreign-sourced income, meaning income derived from sources outside Hong Kong, can be exempted from tax in Hong Kong if certain conditions are met.
Who qualifies for the tax exemption for foreign-sourced income in Hong Kong?
The tax exemption for foreign-sourced income is only available if the following conditions are met:
- Taxpayers have received investment income from overseas on which they have not paid tax abroad.
- Taxpayer had already paid tax on this income in Hong Kong.
- Taxpayers are liable to pay for the interest on their investment income from overseas.
If these requirements are met, then the taxpayer will be exempt from paying taxes on this type of income.
The tax exemption for foreign-sourced income in Hong Kong is available to all taxpayers in Hong Kong who meet the following criteria:
- Have no Hong Kong source income in the year of assessment; and
- Have foreign-sourced income in the year of assessment and in the previous year of assessment.
The tax exemption is available only in respect of the foreign-sourced income, and not in respect of any Hong Kong sourced income.
The tax exemption is not available to taxpayers who have Hong Kong sourced income in the year of assessment or in the previous year of assessment.
How does the tax exemption work in Hong Kong?
The tax exemption for foreign-sourced income in Hong Kong is a great way to minimize the impact of double taxation. Here are the basics of the tax exemption:
- With the option of company formation services in Hong Kong, the company can apply for exemption when they pay their income tax.
- However, the company needs to meet certain requirements for this exemption to be granted, such as having a minimum turnover in Hong Kong (HK$100,000).
- If the company has an taxable profit of HK$200,000 or less and they don’t have any foreign-sourced income, then they do not need to file an application for this exemption.
- There are different rates with which you will be able to enjoy this tax exemption depending on your circumstances and what type of business you own.