For Indian businesses that buy from Chinese manufacturers and sell to India, the Gulf or Africa, a Hong Kong trading company remains the standard intermediate vehicle: a common-law jurisdiction, no VAT, no withholding on dividends, a currency pegged to the dollar and a banking system built for trade. Its tax system is attractive but frequently misdescribed, and the Indian side of the structure is where the real exposure lies.
Quick answer
- Two-tier profits tax: Hong Kong profits tax is 8.25% on the first HKD 2 million of assessable profits and 16.5% above that, for one company per group.
- Offshore claim cuts both ways: The facts that make trading profits offshore in Hong Kong, such as a director negotiating from Mumbai, can make the company resident in India under POEM.
- Transfer pricing on the margin: The margin left in Hong Kong must be at arm's length for the functions it performs, documented, and reported in Form 3CEB.
- Substance makes it work: A Hong Kong company works when it has staff handling sourcing, a director resident in Hong Kong, contracts signed there and a margin reflecting that work.
How Hong Kong taxes profits
Profits tax is charged only on profits arising in or derived from Hong Kong from a trade carried on there. The rate is 8.25% on the first HKD 2 million of assessable profits and 16.5% above that, for one company per group. There is no capital gains tax, no VAT or sales tax, no withholding tax on dividends or interest, and no tax on dividends received. Accounts must be audited by a Hong Kong CPA every year and filed with the profits tax return; a company secretary and a registered office in Hong Kong are mandatory, and the register of significant controllers must be kept.
The offshore claim — what it actually takes
Because the system is territorial, a Hong Kong company whose trading profits are sourced outside Hong Kong can claim them as offshore and pay no profits tax. The Inland Revenue Department examines where the contracts of purchase and sale were negotiated and concluded, where the goods were shipped, where the staff sat and where the decisions were taken. A company with no Hong Kong staff, whose director negotiates with Chinese suppliers and Indian customers from Mumbai and whose goods never touch Hong Kong, has a strong offshore case on the Hong Kong side — and, for exactly the same reasons, a serious POEM problem on the Indian side. The two analyses are mirror images: the facts that make the profit offshore in Hong Kong make the company resident in India. Structures that ignore this have a tax-free company that is in truth taxable at Indian rates.
The foreign-sourced income exemption regime
Since 2023 Hong Kong taxes certain foreign-sourced passive income — dividends, interest, intellectual property income and, from 2024, gains on the disposal of assets — when received in Hong Kong by a company that is part of a multinational group, unless it meets an economic substance requirement or a participation exemption. Pure trading income is not affected, but a Hong Kong company that also holds subsidiaries or lends to group companies must plan for it.
Banking
Opening a corporate account in Hong Kong for a newly formed company with Indian directors is the hardest part of the exercise and can take months. Banks want a clear trade story: supplier contracts, customer contracts, shipping documents and, ideally, a track record. Virtual banks and licensed money service operators have eased the position for smaller traders, and some businesses open the operating account in Singapore or the UAE instead. Plan the banking before incorporating, not after.
The Indian issues
- Transfer pricing. Purchases by the Indian company from its Hong Kong affiliate are international transactions with an associated enterprise. The margin left in Hong Kong must be at arm's length for the functions it performs, documented, and reported in Form 3CEB. A Hong Kong company that adds 25% to a Chinese supplier's price while performing no real function is the classic transfer-pricing adjustment.
- Customs valuation. Imports from a related supplier are examined by the Special Valuation Branch, which can reject the invoice price for duty purposes if the relationship influenced it.
- Treaty. India and Hong Kong have had a comprehensive tax treaty since 2018–19. It gives relief on dividends and interest and a permanent-establishment threshold, but it contains an anti-abuse rule and does not protect a company managed from India.
- ODI and disclosure. The investment is ODI under the 2022 rules with Form FC, UIN and APR; the shareholding goes into Schedule FA every year.
When it works
A Hong Kong company works when it does something: staff in Hong Kong or Shenzhen who handle sourcing and quality control, a director resident in Hong Kong, contracts signed there, and a margin that reflects that work. Then the offshore claim, the Indian transfer pricing and the POEM position all point the same way. Set up as an invoicing shell, it fails all three tests at once.
Questions we are asked
Does Hong Kong tax dividends or capital gains? Generally no. Hong Kong has no capital gains tax, no withholding tax on dividends or interest and no tax on dividends received, although since 2023 certain foreign-sourced passive income received by multinational group companies can be taxed unless substance or participation tests are met.
Does a Hong Kong company need an annual audit? Yes. Accounts of a Hong Kong company must be audited by a Hong Kong CPA every year and filed with the profits tax return, and a company secretary and registered office in Hong Kong are mandatory.
Is there a tax treaty between India and Hong Kong? Yes. India and Hong Kong have had a comprehensive tax treaty since 2018–19, giving relief on dividends and interest and a permanent-establishment threshold, but it contains an anti-abuse rule and does not protect a company managed from India.
How long does it take to open a Hong Kong corporate bank account with Indian directors? It can take months. Opening an account for a newly formed Hong Kong company with Indian directors is the hardest part of the exercise, and banks want supplier contracts, customer contracts, shipping documents and ideally a track record.
How we approach it
We design the functions the Hong Kong company will genuinely perform, price them at arm's length, incorporate through a licensed Hong Kong secretary, and handle the Indian ODI, 3CEB and Schedule FA. Hong Kong setup or contact us.
Disclaimer
This note is for general information and knowledge purposes only. It describes the position as at 14 October 2026 and is not legal, tax or professional advice. Tax law changes frequently; please confirm the current position with us before acting.
Tax, GST and business setup advisors — Mumbai and Thane. Contact us to discuss your situation.
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