Companies typically initiate an offshore profit claim when filing their annual Profits Tax Return. This is not a pre-approval process or a separate application that needs to be submitted in advance. Instead, it is a declaration made within the tax return itself, where the company asserts that specific profits were sourced entirely outside Hong Kong. This self-declaration must be rigorously supported by the company's detailed accounting records and robust documentation that conclusively proves the foreign origin of the profits. It's important to ensure consistency between your accounting treatment of revenue and expenses and the tax claim you are making from the outset. Companies often begin considering this claim as soon as they engage in business activities that generate income from operations performed wholly outside Hong Kong, such as international trading where goods are never stored in Hong Kong, or services rendered entirely by overseas staff to overseas clients. Proactive preparation of supporting documents is essential from the very beginning of such activities.

Comprehensive documentation is absolutely critical for substantiating an offshore profit claim and effectively addressing any inquiries from the Inland Revenue Department (IRD). Key documents include a complete set of sales contracts and purchase orders that clearly show the parties involved and the location of the transactions. Detailed invoices for goods or services, along with corresponding bank statements that reflect the flow of funds originating and terminating outside Hong Kong, are also essential. For trading activities, shipping documents such as bills of lading, airway bills, and customs declarations are vital to demonstrate that goods did not pass through Hong Kong. Additionally, companies should prepare detailed operational charts and organizational structures illustrating where key business activities, such as negotiation, contract signing, and order fulfillment, were performed. Evidence of staff presence, assets, and actual operations overseas is paramount, which can be demonstrated through employment contracts for overseas staff, rental agreements for foreign offices or warehouses, and utility bills. Travel logs and communication records, including comprehensive emails, meeting minutes, and call records with overseas clients or suppliers, are crucial to illustrate the non-Hong Kong based nature of business decisions and execution. A thorough functional analysis outlining the specific activities performed outside Hong Kong, identifying where key decisions were made and executed, and by whom, is also highly recommended to clearly articulate the offshore nature of the profits.

An offshore claim tax query letter, often simply referred to as an IRD query letter, is an official inquiry issued by the Inland Revenue Department (IRD) in Hong Kong. This letter is sent to a company when the IRD is reviewing its submitted Profits Tax Return and has specific concerns or requires further clarification and supporting evidence regarding an offshore profit claim that has been made. The issuance of such a letter indicates that the company's claim for tax exemption on profits is under scrutiny. The letter will meticulously specify the particular areas of concern, such as the nature of the business activities, the role of Hong Kong staff, or the flow of funds, and will explicitly list the additional documents, information, or explanations needed to justify the claim. This signals that your offshore claim requires a detailed, well-substantiated, and timely response to prevent the claim from being denied. Companies receiving such a letter should treat it with utmost seriousness, as a well-prepared and comprehensive reply is crucial for a successful outcome.

When the Inland Revenue Department (IRD) accepts a company's response to an offshore claim tax query letter, it means the IRD has reviewed the submitted evidence and is satisfied that the profits in question were indeed sourced outside Hong Kong and thus qualify for tax exemption under the territorial source principle. This favorable outcome is typically communicated through an official letter from the IRD stating that “no tax adjustments are required in relation to the issues raised in the enquiry” for the specific assessment year. This grants the company a significant advantage, as it confirms the tax-exempt status of those particular profits. A key benefit of this acceptance is that, typically, the IRD will not send another detailed tax query letter questioning the business activities for the company's offshore claims for several subsequent years, provided the company's business activities and operational structure remain substantially unchanged. This provides a period of certainty and predictability regarding the company's tax position, allowing management to focus on business growth without constant concerns about tax inquiries related to offshore profits. It signifies a successful demonstration of compliance and the territoriality of income.

If the Inland Revenue Department (IRD) concludes, after reviewing the submitted evidence and responses, that the company’s activities were indeed effected in Hong Kong, or that the documentation provided is insufficient to prove the offshore nature of the profits, the IRD would reject the offshore claim. This means that the profits previously declared as offshore and tax-exempt will be assessed as taxable income. Consequently, the IRD would issue a revised assessment, and a tax demand note for the total amount of taxes that are now deemed payable, often along with any applicable interest or penalties for late payment or under-declaration. The company would then be liable to pay profits tax on those previously exempted profits, typically at the standard Hong Kong profits tax rate (16.5% for corporations, or the two-tiered rates if applicable to the total assessable profits). In such a scenario, companies have the right to object to the assessment and potentially appeal the IRD's decision. However, this process can be complex and time-consuming, often requiring further legal and tax advice. It underscores the critical importance of having robust documentation and a clear operational structure from the outset to support any offshore profit claims.