Hong Kong Company Formation in 2025: Offshore Claims, Substance, and Geopolitical Considerations

Introduction: Hong Kong as an Offshore Hub

Hong Kong has for decades been one of Asia's premier business centres, combining low corporate tax rates (16.5%), no capital gains tax, no withholding tax on dividends, no inheritance tax, and an efficient common law judicial system. The territorial tax principle — which taxes only Hong Kong source profits — has made the HK company formation a staple of Asia-Pacific tax planning.

However, the landscape in 2025 is materially different from a decade ago. The post-BEPS environment has tightened the offshore claim for profits tax, banking access for HK entities has become substantially more demanding, and the geopolitical shift following the 2020 National Security Law has created strategic uncertainty that many international investors are factoring into their structure decisions.

---

Company Formation Under the Companies Ordinance

The Legal Framework

Hong Kong companies are governed by the Companies Ordinance (Cap 622), which came into force on 3 March 2014 as a comprehensive modernisation of the previous Companies Ordinance (Cap 32). The Ordinance provides for:

• Private companies limited by shares (most common)
• Public companies
• Companies limited by guarantee (non-profit)
• Unlimited companies

The Companies Registry, which sits under the Financial Services and the Treasury Bureau, processes all incorporation filings.

Formation Process and Requirements

Incorporation in Hong Kong is straightforward:

Requirement	Details
Minimum directors	1 natural person (corporate sole director not permitted for private companies)
Minimum shareholders	1 (no maximum for private company)
Minimum share capital	None prescribed (HKD 1 is sufficient)
Residency requirement	None (director can be any nationality, any country of residence)
Company secretary	Required — must be Hong Kong resident individual or body corporate
Registered office	Must be in Hong Kong

Documents required for incorporation:

• Form NNC1 (Articles of Association adoption) or model Articles
• Notice of Registered Office (Form NR1)
• Particulars of Directors (Form NNO1)

Formation Costs and Timeline

Item	Cost (HKD)	Notes
Government incorporation fee	HKD 1,720	Paid to Companies Registry
Company secretary / agent annual fee	HKD 2,000–8,000	Varies by service provider
Business Registration Certificate	HKD 250 (1 year)	Issued by Inland Revenue Dept
Registered office	Included in agent fee or HKD 1,200–3,000/year separately

Formation timeline: 1 business day for online filing; hard copy filing takes 4–7 business days.

---

The Territorial Tax Principle and Profits Tax

Profits Tax Rate

Hong Kong charges Profits Tax on assessable profits arising in or derived from Hong Kong. The standard rate is:

• First HKD 2,000,000 of assessable profits: 8.25%
• Profits above HKD 2,000,000: 16.5%
• No capital gains tax
• No withholding tax on dividends paid out of HK
• No withholding tax on interest or royalties (in most cases)

The Offshore Claim

Under the territorial principle, profits that arise outside Hong Kong are not subject to Profits Tax. A Hong Kong company can apply to the Inland Revenue Department (IRD) for an "offshore claim" — a determination that its profits are not Hong Kong source profits.

If the offshore claim is accepted, the company pays zero Profits Tax on the relevant profits. This creates the core appeal of the HK company for international trading and investment holding.

DIPN 39: The IRD's Guidance

Departmental Interpretation and Practice Notes No. 39 (DIPN 39), originally issued in 1998 and updated periodically, sets out the IRD's approach to determining whether trading profits are offshore in nature.

Key principles from DIPN 39:

1. The source of profits test: the IRD looks to the "operations" that give rise to the profit, and asks where those operations were performed
2. The "contract effected" test: for trading companies, the source is determined by where the contracts of purchase and sale were negotiated and concluded
3. Where sales contracts are negotiated: if negotiations take place outside Hong Kong (e.g., by a sales representative in China or the UK), the profits from those sales may be treated as offshore
4. Where purchase contracts are negotiated: similarly, if goods are sourced by purchasing agents outside HK, those purchase profits may be offshore
5. "Both contracts" test: the IRD has historically applied a "both contracts" test for trading companies — if both the purchase and sale contracts are effected outside HK, the profits are offshore

The Post-BEPS Treatment of Offshore Claims

Following the OECD BEPS recommendations, the Hong Kong government enacted the Inland Revenue (Amendment) (Taxation on Specified Foreign-Sourced Income) Ordinance 2022 (FSIE regime), effective from 1 January 2023.

The FSIE (Foreign-Sourced Income Exemption) regime changes the treatment of certain passive income received by Hong Kong-connected entities (broadly, entities connected to a multinational group with consolidated revenue above HKD 750 million). Under the FSIE regime:

Income Type	Pre-FSIE	Post-FSIE
Dividends	Always exempt (territorial + participation exemption)	Taxable unless economic substance or participation conditions met
Interest	Offshore claim available	Taxable unless substance conditions met
Disposal gains (on shares)	Capital (no tax) or offshore	Taxable unless substance conditions met
IP income	Offshore claim or patent box	Taxable unless nexus conditions met

For smaller companies (below the MNC group revenue threshold): the FSIE regime does not apply, and the traditional territorial tax approach continues.

---

Substance Requirements for Offshore Claims

What Substance Is Required?

The IRD has increasingly scrutinised offshore claims and now expects applicants to demonstrate:

1. Operations conducted outside HK: clear evidence that the revenue-generating activities (negotiations, fulfilment, sourcing) occur outside HK
2. Local substance proportionate to claimed offshore income: an entity claiming all its profits are offshore but conducting all its management in HK is unlikely to succeed
3. Directors making decisions outside HK: for an offshore claim based on management/investment activity, the key decisions must be demonstrably made outside HK
4. Documentary evidence: contract files, correspondence, travel records, management meeting minutes showing activities occurring outside HK

The IRD issues assessments requiring taxpayers to self-assess and then defend offshore claims on audit. The offshore claim must be maintained consistently year-on-year with supporting documentation.

---

Banking Access Reality in 2025

The Major Bank Position

The banking reality for newly formed HK companies seeking to demonstrate offshore status has changed substantially:

HSBC (Hong Kong): continues to onboard HK companies but requires substantial evidence of genuine business activity. For holding companies or trading companies with no HK operations, HSBC's compliance team now requires significant additional evidence including contracts, proof of clients, and often an on-site interview.

Standard Chartered (HK): similar approach to HSBC; offshore-claiming entities require stronger justification.

Bank of China (HK): generally more accessible for PRC-connected businesses but applies enhanced scrutiny to purely holding or trading structures.

DBS, OCBC (HK branches): Singapore-headquartered banks with HK branches; moderate accessibility; some preference for Singapore-connected structures.

The reality for offshore claims + banking: a company claiming offshore status (i.e., that all its operations are outside HK) but seeking a HK bank account creates an inherent tension. The bank asks: if you do nothing in HK, why do you need a HK account? Convincing answers include: accessing HK capital markets, paying HK-connected suppliers, or receiving payments denominated in HKD.

Neobanks and EMIs in HK

Several Hong Kong-licensed virtual banks (Mox, ZA Bank, WeLab Bank) are accessible but primarily serve retail customers. For corporate accounts, they have limited capacity for offshore-claiming entities.

---

Geopolitical Considerations

The National Security Law (2020) and Its Implications

Hong Kong's National Security Law (NSL), enacted in June 2020, has had several structural implications for international businesses:

1. Common law independence: the NSL has introduced provisions outside the common law framework, with national security cases tried without jury. The independence of HK courts in commercial matters is generally maintained, but the overall judicial environment has changed.

2. Professional emigration: a significant number of senior lawyers, accountants, and financial professionals emigrated from HK post-2020. This has affected the depth of professional services available.

3. Sanctions risk: some Western governments (US, UK, EU, Canada, Australia) have imposed sanctions on specific HK officials and have taken actions relating to HK. This does not affect most commercial entities but adds a layer of geopolitical risk.

4. US-China tensions: the broader US-China trade and technology tension means that HK-based entities in technology, semiconductors, and certain other sectors face additional regulatory scrutiny from US authorities.

When HK Still Makes Sense

Despite the geopolitical shift, HK remains highly suitable for:

• Asian trading companies: genuine trading operations sourcing from China and selling regionally
• Asset management: HK's SFC-regulated fund management framework is well-regarded in Asia
• IP licensing into China: HK has a tax treaty with mainland China (2006 Comprehensive Arrangement) with a 5% withholding on royalties for qualifying Hong Kong companies
• Listed company structures: HK Stock Exchange (HKEX) is a major global exchange; HK-incorporated listed companies benefit from the established legal framework

For purely offshore holding structures with no Asian operational rationale, alternative jurisdictions (Singapore, Cayman, BVI) may now offer better banking access and less geopolitical uncertainty.

---

HK vs Singapore: A Comparison

Feature	Hong Kong	Singapore
Corporate tax rate	16.5% (8.25% on first HKD 2M)	17% (exemptions for SMEs)
Territorial tax principle	Yes	Yes (with modifications)
Capital gains tax	None	None
Withholding tax on dividends	None	None
Banking access	Good (declining for pure holdcos)	Very good
Political stability	Uncertain	Very high
Treaty network	Moderate (47 treaties)	Extensive (90+ treaties)
FSIE / BEPS measures	Yes (2023 FSIE regime)	Yes (FSIE from 2024)
Professional services depth	Deep (though diminished)	Deep
PRC treaty access	Yes (Comprehensive Arrangement)	Yes (China-Singapore DTA)

---

HPT Group and Hong Kong Structure Advisory

HPT Group advises clients on Hong Kong company formation and the ongoing management of offshore claims, including the evidential requirements to support the claim under DIPN 39 guidance and the post-FSIE compliance framework. We also advise on the geopolitical risk considerations for clients reviewing their existing HK structures and assist with migration to alternative jurisdictions where appropriate. For clients for whom HK remains the optimal base, we provide company secretarial, compliance management, and banking introduction services in conjunction with our Hong Kong professional partners. Contact HPT Group to discuss your Hong Kong structuring requirements.