A. Overview of Compliance Obligations

Rules that every Private Company Limited by Shares (Limited Company) must conform to.

Internal Record: Annual Accounts

One (1) Profit and Loss Account (P&L) and a balance sheet for the Limited Company must be audited by Hong Kong registered auditors (i.e. Certified Public Accountants) and be present to the shareholders in general meeting within 18 months after incorporation incorporation and then at least once in every calendar year. Limited companies are required to file their accounts with the Inland Revenue Department (IRD)

Internal Record: Directors’ report

A directors’ report must be prepared in conjunction with the annual accounts. The Companies Ordinance provides a list of what this report should contain and this list includes details of contracts with the company or certain companies with which it is associated which are significant in relation to the company’s business and in which any director has a material interest.

Internal Record: Annual general meeting (AGM)

According to the latest updates, all limited companies can dispense AGMs if and only if certain requirements are met for advanced companies’ flexibility plus cost saving, here are the criteria for giving up AGMs:

  • With the utilization of written resolution (WR) for decision making and copies of related documents are provided to shareholders by the specific circulation date; OR
  • The incorporated body is a single member company (i.e. the only director is also the only shareholder); OR
  • A resolution about “no AGM is needed” is passed by all members of incorporation, given that such resolution is not revoked and none of the member has proposed for holding an AGM;

Previously, at least one (1) annual general meeting of the shareholders must be held within 18 months after incorporation, and then at least once in every calendar year but not later than 15 months after the last annual general meeting. This 15 month period may be extended at the discretion of the Companies Registry. An annual general meeting must be held even though there may be no accounts available for presentation to the meeting and no other relevant business to attend to.

To hold a AGM, the directors must approve the accounts and the directors’ report, they may recommend a dividend and must resolve to call the annual general meeting. If all the shareholders entitled to attend and vote at the annual general meeting so agree, the meeting may be held at short notice, but otherwise at least 21 clear days’ notice is required. Copies of any audited accounts to be considered at the annual general meeting must be sent to all shareholders, debenture holders and other persons so entitled not less than 21 days before the date of the meeting, unless all shareholders entitled to attend and vote at the meeting otherwise agree.

Internal Record: Holding of Members’ Particular & Registered Address

Forms contained in each company kit make provision for all information required by the Ordinances. The original or copy of the Register of Members must be kept at the Registered Office in the Hong Kong.

Internal Record: Maintenance of Register of Transfers, Directors and Secretaries

A company is required by law to maintain these registers. They must be kept at the Registered Office of the Company.

Internal Record: Maintenance of Minutes and Financial Records

A company is required to keep minutes of all meetings of directors, members, committees of directors, committees of officers and committees of members. Copies of all written resolutions consented to by the foregoing parties must also be kept.

Companies Registry: Filing of Annual Return

An Annual Return must be filed with the Companies Registry at least once a year (except if there has been no change in the filed particulars since the date of the last annual return, in which case a certificate confirming this fact can be filed in lieu of an annual return).

The annual return contains among other things:

  • particulars of the authorized and issued share capital of the company
  • the names and addresses of its directors and the secretary
  • the names and addresses of its registered shareholders
  • the amount secured by any registered charges.

The return must be signed by a director and the secretary of the company and must be filed within 42 days of the anniversary of the incorporation of the company. Public companies and companies limited by guarantee without a share capital must file their annual return within 42 days of the annual general meeting in each year.

Companies Registry: Filings of Changes in Particulars

Filing obligations

A company must file the relevant particulars with the Registrar within the period indicated, in the event of:

  • any change in the directors or secretary or in the filed particulars of any existing directors or secretary – 14 days
  • any change in the location of the registered office – 14 days
  • any increase in the authorised share capital – 15 days
  • any relocation of the company’s statutory books from the company’s registered office – 14 days
  • the passing of a special resolution or certain other resolutions – 15 days
  • any allotment or issue of new shares (this also requires the payment of a capital fee on the amount of any premium over the nominal value at which the shares are allotted or issued) – 8 weeks
  • the creation of a charge over certain types of assets or the acquisition subject to an existing charge of certain types of assets, in either case whether the asset is within or outside Hong Kong – 5 weeks.

In relation to the last two items, if the relevant particulars are not filed with the Registrar within the prescribed period, an application will have to be made to the Court for an extension of the time within which the particulars may be filed. Any such application will need to be supported by an affidavit giving an explanation as to why the particulars were not filed within the prescribed period.

Change of name

To effect a change in the name of a company (which includes the adoption or abandonment of a formal English or a Chinese version of the name):

  • the shareholders must approve of the change in name by special resolution
  • the new name must be registered with the Registrar.

It normally takes about 14 working days from the time of the filing of the special resolution for the certificate of incorporation on change of name to be issued. The change in name is effective from the date on such certificate.

Increases in authorized and issued share capital

Any increase in the authorized share capital of a company requires the approval of the shareholders. A company’s Articles of Association typically provide for the increasing of the company’s authorized share capital by way of ordinary resolution. Any increase in authorized share capital will attract a capital fee and notice of the increase must also be filed with the Registrar together with a signed copy of the resolution.

Changes to Articles of Association

Most of the provisions of a company’s Articles of Association can be changed by special resolution .

There are exceptions to this general rule. Where a company has issued different classes of shares, the special rights of any one class may, subject to the Articles of Association, be changed only with the approval of 75% of the holders of shares of that class. A member must agree in writing to an alteration to the Articles of Association which requires that member to take or subscribe for more shares or increase his liability to contribute to the share capital of the company or otherwise pay money to the company.

A signed copy of every special resolution and every resolution varying a provision in the Articles of Association must be filed with the Registrar and annexed to every copy of the Articles of Association of the company issued subsequently to any such change. When the Articles of Association is amended it must be reprinted and filed with the Companies Registry.

Inland Revenue Department:

B. Filing Obligations with the Companies Registry

Companies must actively comply with below filing requirement by Companies Registry to maintain the validity of the Certificate of Incorporation.

 Filing of Changes of Registration Particulars

A company must file the relevant particulars with the CR within the period indicated, in the event of (with the a period of time after the change):

  • any change in the directors or secretary or in the filed particulars of any existing directors or secretary – 14 days
  • any change in the location of the registered office – 14 days
  • any increase in the authorized share capital (this also requires the payment of a capital fee) – 15 days
  • any relocation of the company’s statutory books from the company’s registered office – 14 days
  • any change of name of a company – 15 days after the passing of the resolution
  • the passing of a special resolution (other than special resolutions to change the name of a company) or certain other resolutions – 15 days
  • any allotment or issue of new shares (this also requires the payment of a capital fee on the amount of any premium over the nominal value at which the shares are allotted or issued) – one month
  • the creation of a charge over certain types of assets or the acquisition subject to an existing charge of certain types of assets, in either case whether the asset is within or outside Hong Kong – 5 weeks

In relation to the last two items, if the relevant particulars are not filed with the CR within the prescribed period, an application will have to be made to the Court for an extension of the time within which the particulars may be filed. Any such application will need to be supported by an affidavit giving an explanation as to why the particulars were not filed within the prescribed period.

Filing of Annual Return (AR)

An Annual Return (AR) must be filed with the CR at least once a year, the AR contains among other things:

  • particulars of the authorized and issued share capital of the company
  • the names and addresses of its directors and the secretary
  • the names and addresses of its registered shareholders
  • the amount secured by any registered charges.

The return must be signed by a director or the company secretary of the company and must be filed within 42 days of the anniversary of the incorporation of the company.

C. Change of Company Name

Requirement of a valid Company Name

Definition: Change of Name

Either 1) Change of English name, 2) Change of Chinese name, 3) Addition of English name4) Addition of Traditional Chinese name, 5) Abandonment of English name, or 6) Abandonment of Traditional Chinese are all regarded as change of company name and must go through the same procedures.

General Requirement of a valid Company Name

The name of a Hong Kong company could be in English only or in Chinese only or in both English and Traditional Chinese. If the name is in English, it must be ended with “Limited”, and if in Chinese, be ended with “有限公司”.

Application Procedures for Change of Name

To effect a change to Company Name (which includes the adoption or abandonment of a formal English or a Chinese version of the name):

  1. Company Name Search and Trademark Register Search to check any violation of the proposed Company Name to the existing one.
  2. the shareholders must approve of the change in name by special resolution
  3. register the new Company Name with the CR. It usually takes 4 working days for hardcopy submission / 1 hour electronic submission from the time of the filing of the Change of Company Application form NNC2 giving notice of the change of name for the Certificate of Change of Name to be issued. The change  is effective from the date on such certificate. Government fee applied.
  4. The Business Registration Office (BRO) is also be notified of this application, the amended Business Registration Certificate will be posted to Registered Office Address by local post from BRO. The NNC2 sample is also available.
  5. The Certificate of Change of Name must be collected in person at CR office.
  6. the Company should order a new common seal and adopt the new seal as common seal of the Company by a ordinary resolution.

D. Changes of Articles of Association

Articles of Association is the constitution of a company.

Requirement of Content of Articles of Association

  • The Company Name.
  • The Memorandum must also include a declaration as to liability.
  • Perhaps the most important aspect of the Memorandum is what is generally referred to as the Objects Clause.
  • A Capital Clause.
  • The Association Clause.

Procedures for amendment of Articles of Association

Most of the provisions of a company’s Articles of Association can be changed by special resolution.

There are exceptions to this general rule. Where a company has issued different classes of shares, the special rights of any one class may, subject to the Articles of Association, be changed only with the approval of 75% of the holders of shares of that class. Where the special rights exist by virtue of the Articles of Association and there is no provision for alteration, all such shareholders must agree before the rights can be changed. Also, a member must agree in writing to an alteration to the Articles of Association which requires that member to take or subscribe for more shares or increase his liability to contribute to the share capital of the company or otherwise pay money to the company.

A signed copy of every special resolution and every resolution varying a provision in the Articles of Association must be filed with the Registrar and annexed to every copy of the articles of Association of the company issued subsequently to any such change. When the Articles of Association is amended a printed copy of the articles as amended must be filed with the CR.

E. Issuing shares

The management of a company’s shares is a vital for controlling the ownership.

The issuing of new shares in a company is a three-stage process involving the following:

  1. The allotment by the directors of the shares to particular persons and the issuance of the shares to such persons after the entering into the company’s register of shareholders of the relevant particulars.
  2. Allotments of shares. Other than allotments pursuant to offers to existing shareholders pro-rata to their existing holdings, may only be made with the prior approval of the shareholders in general meeting. This approval may be given either in relation to a particular allotment or allotments or generally. In either case this shareholder approval expires (if not previously revoked by the company in general meeting) when the next annual general meeting of the company is held or ought to be held.
  3. A return of allotment of shares. Disclosing the members and their shareholdings must be filed with the CR within one month of the date of the allotment. If this time limit is not met, the Registrar will usually refuse to accept the return of allotments for filing and an application will have to be made to the court for leave to file the return out of time.

A share may be beneficially owned by someone other than the registered holder. For a private company, it is not normally necessary for the identity of the beneficial owner to be revealed to the company or to any authority or to be a matter of public record, although a subsidiary is required to state in its accounts the name of its ultimate holding company.

Therefore, Nominee Shareholder service may be considered for protection of privacy.

F. Share transfers

The important step for ownership transfer.

The transfer of legal title to shares in a Hong Kong company is effected by an “instrument of transfer”. Beneficial title to shares is transferred by way of contract notes (a bought note and a sold note).

Contract notes must be submitted for stamping within two days (30 days if the sale takes place outside Hong Kong) of their execution. Ad valorem stamp duty is levied on each contract note (i.e. both the bought note and the sold note) at the rate of HK$1.00 per HK$1,000 or part thereof, of, whichever is the higher of the consideration paid or the value of the shares transferred (so that the total rate of duty on a sale of shares is effectively 0.2%) . Exemptions from stamp duty are available for intra-group transfers. We will be pleased to provide more detailed advice on the requirements for exemption on request.

A copy of the latest audited accounts (consolidated where relevant) or latest management accounts (if audited accounts have not been prepared or if they are not up to date) together with details of any land and properties held and a copy of any sale and purchase agreement must normally be submitted when the documents are lodged for stamping. The Stamp Duty Office may also require additional information.

The instrument of transfer attracts a HK$5 fixed duty. In the case of a sale and purchase of shares by a person who is not resident in Hong Kong, the ad valorem stamp duty can be paid on the instrument of transfer in additional to the HK$5 fixed duty if contract notes have not been made out and stamped.

Where a transfer of the beneficial ownership is made otherwise than by sale and purchase e.g. by way of gift, the instrument of transfer is stampable at the fixed rate of HK$5 plus ad valorem stamp duty of 0.2% of the value of the shares at the date of transfer.

When there is a sale of beneficial ownership only and no transfer of legal ownership (i.e., where the shares will remain registered in the name of the same person as a nominee for the beneficial owner), contract notes must be made out and ad valorem stamp duty of 0.2% paid. An instrument of transfer will not be required in this case but it is advisable for there to be a declaration of trust (see below).

Ad valorem stamp duty is not payable on a transfer in registered ownership which does not involve any change in the beneficial ownership of the shares. Where shares are registered in the name of a nominee, it is sensible to execute a declaration of trust and to have the declaration of trust adjudicated as not chargeable to duty. The fee for this is HK$20. Adjudication can avoid later disputes with the Stamp Duty Office about the beneficial ownership of shares.

Penalties for failure to stamp documents within the required time range from two to ten times the amount of duty payable, although the Collector of Stamp Revenue has power to remit the whole or any part of any penalty in appropriate cases. Neither the company nor any other person is permitted to act on or in general rely in court proceedings on any stampable instrument which is not duly stamped. An unstamped instrument may not be registered in the company’s books.

After stamping (and compliance with any other formalities prescribed by the articles of association), the transfer can be registered in the statutory books of the company and a new share certificate issued.

Share transfers are sometimes restricted by, for example, provisions in the company’s articles of association which require that the shares are first offered for sale to existing shareholders.

G. Employer’s Return

Even a company has sole-director-and-shareholder, this return is still required.

Definition of Employer’s Return

The Employer’s Return is issued by the Inland Revenue Department (IRD) annually for the purpose of reporting the amount of remuneration, including salaries, wages, commission etc, paid to each employee during a year of assessment (from April 1 previous year to 31 March current year).

Filing of Employer’s Return

The Employer’s Return for a year of assessment is issued to all employers on the first working day of a year of assessment preceding to the year if assessment concerned. All employers are required to furnish the return within one month from the date of issue, unless an application for extension in writing is filed with the Inland Revenue Department (IRD) on or before deadline for submission.

Application for Extension of Submission Period

The return should be submitted to the IRD within one month from the date of issue unless otherwise stated. Employer may apply for an extension of time to submit the Return, applications for extension should be in writing and supported by reasonable grounds and the following information:

  • your company’s name and file number
  • the year of assessment concerned,
  • the time required, and
  • details of the reasons in support.

Request for Issue of Duplicate Return

Employers can write to the Inland Revenue Department for duplicate annual employer’s return with provision of your employer’s file number, company name, the year of assessment and your postal address in the request letter.

H. Filing of Profits Tax Return

“‘In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin (1706-90)

Preparation of Filing of Profits Tax Return

A body corporate carrying on a business in Hong Kong has to file a Profits Tax Return (Form BIR51, sample is available) for every year of assessment. The tax return must be supported by the following:

  • a certified copy of audited Balance Sheet and Profit and Loss Account and Director Report;
  • a certified copy of Auditor Report;
  • a tax computation showing how the Assessable Profits are computed from the accounting profits;
  • schedules of the following items (where applicable):
    • capital expenditure incurred, capital assets sold, depreciation charged in the accounts and assets not in use at the end of the basis period;
    • details of expenditure incurred on, and disposal proceeds of, scientific research;
    • details of expenditure incurred on refurbishment of buildings – the location and the usage of building during the year;
    • details of reserves and provisions, showing transfers to and from the related accounts;
    • details of extraordinary gains and losses;
    • details of any service / management fee received including name and address of each payer,
    • details of interest paid or payable, including name and address of the lender, any security to the lender, and the usage of the loan;
    • details of income claimed to be with a non-Hong Kong source;
    • details showing the name and address of payments involving contractor / sub-contractor fees, management fees, commission, royalties, legal and other professional fees, and hiring charges for the use of a movable property in Hong Kong;
    • details of bad debt provisions and write-offs;
    • details of change in method of valuation of stock; and
    • details of rent payments including name and address of the landlord, the property location, the total rent paid and the period covered.

 The Inland Revenue Ordinance does not requires the corporation’s accounts to be audited. Rather, it is the Companies Ordinance that makes the requirement. So, if the corporation is registered in a country without audit requirement, the IRD may accept unaudited accounts providing they are certified by the directors. Besides, a Hong Kong limited company may be exempt from audit under the Companies Ordinance such as a dormant company, the IRD will also accept unaudited accounts.

Deadline and Extension for Filing of Profits Tax Return

There are two types of issue of profits tax returns:

the odd issue. The odd issue of tax returns is on a case by case basis throughout the year of assessment at the discretion of the assessing officer. The time limit to file a tax return is usually set at one month from the date of issue save the urgent cases, for example a sole trader has ceased his business and is going to leave Hong Kong permanently, in which the time limit may be less than one month.

the bulk issue. The bulk issue of tax returns is done by the computer in April to a lot of taxpayers according to their accounting dates. Although the time limit for filing the tax returns on bulk issue is also set at one month from the issue date, the taxpayer can ask for an extension of the time limit if his accounting date falls in the categories “M” and “D”.

The extension applies to the current year of assessment only. Automatic extension is granted to those taxpayers who are represented by a tax representative. Unrepresented taxpayers will be granted the extension upon written request. The exact dates and details of the extension may differ slightly from year to year and they are published on the IRD’s website. Although in general no further extension will be granted beyond the above time limits, the assessor may extend the time limit in special cases where the taxpayer has pressing problems in meeting the deadline.

I. Business Registration Certificate

It is the certificate for your company to carry business(es) in Hong Kong.

Application of Business Registration Certificate / Branch Registration Certificate

Under the “One-stop Company and Business Registration” jointly presented by Inland Revenue Department (IRD) and Companies Registry (CR), companies will only be required to lodge one single application for both the Certificate of Incorporation (CI) and the Business Registration Certificates (BRC).

The registration of branch requires the application of Branch Registration Certificate (BRC) to commence business of a branch in Hong Kong.

For your reference, the process of filing Annual Return is for the renewal of CI.

Renewal of Business Registration Certificate

Business Registration Certificate are normally valid for either 1 year or 3 year up to the choice of business owner. For registered business, a business registration renewal demand note will be sent by the Business Registration Office approximately 1 month before the current Business Registration Certificate expires. Upon payment, the demand note will become a valid Business Registration Certificate. If you do not receive such a demand note, you should inform the Commissioner in writing within 1 month of the expiry of your current Business Registration Certificate.

Renewal of Branch Registration Certificate

Branch Registration Certificate are normally valid for either 1 year or 3 year up to the choice of business owner of the mother business owner. For branch of registered business, a branch registration renewal demand note will be sent by the Business Registration Office approximately 1 month before the current Branch Registration Certificate expires. Upon payment, the demand note will become a valid Branch Registration Certificate. If you do not receive such a demand note, you should inform the Commissioner in writing within 1 month of the expiry of your current Branch Registration Certificate.

Renewal Procedure

If you wish to renew your business registration in person, you should approach the Business Registration Office. You should take with you your old Business Registration Certificate and request a duplicate demand note be issued. If your business address has changed but the Business Registration Office has not been advised, you should also inform the Commissioner of your new address (see below for more details).

If you are renewing your business registration by mail, you should send a photocopy of your old business registration certificate with a crossed cheque made payable to “The Government of the Hong Kong Special Administrative Region” to the Business Registration Office. A receipted duplicate Business Registration Certificate will be mailed to your business address soon afterwards. Again, if your business address has changed and the Commissioner has not been notified, you should also attach an advice of the new address.

Government Fee applied.

Although it is possible to select either 1-year and 3-year Branch Registration Certificate for a Branch, its valid period is never longer than the valid period of its owner’s Business Registration Certificate. Therefore, you may charged the government fee for a 3-year Branch Registration Certificate and its valid period is less than 3-year.

J. Managerial Meeting

Record of internal management meeting is essential and should be held regularly.

Where a private company only has one shareholder and that shareholder takes a decision that may be taken in a shareholders’ meeting, the decision shall be evidenced by a written resolution or a written record of the decision which must be delivered to the company within 7 days of the decision having been made.

Directors and Board Meetings

For a typical Private Limited Company, the director board authorizes the actions of the company through board resolutions passed at board meetings or, if authorized by the articles, by written resolution signed by all the directors or a stated proportion of them.

There is no physical location and time interval requirement that board meetings be held in Hong Kong or at any specific intervals. Normally, reasonable notice of meetings must be given to each director, but the Articles of Association can modify this general obligation. The board of directors may delegate its powers to certain persons. A certain degree of delegation is, so far as third parties dealing with the company are concerned, normally implied in the case of managing directors and senior employees of a company.

Shareholders and Shareholder Meetings

Certain decisions however must, by law, be made or sanctioned by the shareholders in general meeting. This is done by the passing of an ordinary or, in some cases, a special resolution. Such resolutions may be proposed as special business at annual general meetings or at separately convened meetings, called extraordinary general meetings.

An ordinary resolution requires a simple majority of the shareholders who attend and vote at a meeting to approve it. A special resolution , on the other hand, requires a 75% majority of the shareholders who attend and vote at a meeting to approve it.

Generally, 14 clear days’ notice is required for a meeting at which an ordinary resolution is proposed and 21 clear days’ notice is required for a meeting at which a special resolution is proposed or for the holding of an annual general meeting. A majority in number of shareholders having the right to attend and vote at general meetings who together hold not less than 95% in nominal value of all the shares, or all the shareholders in the case of an annual general meeting, may agree that a meeting be held at short notice.

The Articles of Association should make provision for the quorum and voting rights and will determine whether or not the chairman of the meeting has a casting vote. There is a statutory right on the part of a shareholder to appoint a proxy to attend and vote on his or her behalf at any meeting at which the shareholder is entitled to attend and vote. A statement to this effect must be included in the notice of each general meeting. A proxy need not be a member and will have the same right to speak at the meeting as his or her appointor. A corporation which is a member can attend a meeting by appointing a representative to attend the meeting on its behalf. Such a representative can speak and vote on a show of hands or on a poll. A proxy’s rights to vote are limited to voting on a poll unless the Articles provide otherwise. It is usually necessary to lodge appointments of proxies (but not of corporate representatives) in advance of the meeting.

A Hong Kong company’s Articles of Association will usually permit resolutions to be passed by a written resolution signed by all the shareholders, without the need to hold a meeting, however notice of written resolutions must be provided to the auditors at or before the time of submission to members for signature. (Every company must hold a general meeting as its annual general meeting each year. This may not be done by written resolution.)

K. Business Records Keeping

Keeping of responsible accounting records for tax and auditing required by Inland Revenue Department (IRD)

All Business Entities Keeping Accounting Records

Inland Revenue Department (IRD) of Hong Kong, the Hong Kong tax authority, will issue a Profits Tax Return (PTR) to every business entities registered in Hong Kong (i.e. including company incorporated in Hong Kong). Directors of a company have to complete PTR and return it together with a copy of audited accounts, unless a company has been applied to be Dormant.

However, the IRD does not exempt the company from auditing of its financial statements. Therefore, every company must to prepare its account and engage a Hong Kong Certified Public Accountant registered with HKICPA (the statutory body regulating the accounting profession in Hong Kong) to carry out an audit of the financial statements of the company.

Legally Required Operating Records

According to the Inland Revenue Ordinance, HK IRD has given authority to require each registered business entities has to keep its operating record as follows:

  • books of accounts recording receipts and payments, or income and expenditure;
  • vouchers, bank statements, invoices, receipts;
    • Banking records (e.g. check books, bank deposit slips, bank statement, cheque butts and bank advices)
    • Records of income (e.g. Receipts, Invoices issued and credit notes)
    • Records of purchases and expense (e.g. receipts obtained for payments made and invoices received)
  • records of the assets and liabilities of the person in relation to that trade, profession or business; (e.g. Invoices received, receipts obtained for payments made and contract of purchase and sales)
  • records of all entries from day to day of all sums of money received and expended in relation to that trade, profession or business;
  • where that trade, profession or business involves dealing in goods, you must maintain records relating to your purchases and sales:
    • Full particulars of all goods purchased and all goods sold.
    • Invoices for the transactions must show goods, and buyers and sellers;
    • Records of stock movement;
    • Statements of trading stock held by the person at the end of the accounting period and all records of stocktakings from which any such statement of trading stock has been prepared;
  • where that trade, profession or business involves the provision of services, you must keep a record all services provided in sufficient detail:
    • all agreements and contracts

The Ordinance requires that every company carrying out business in Hong Kong must keeps sufficient records in either English or Traditional Chinese language of its income and expenditure to enable the assessable profits to be readily ascertained. Such records shall be retained for a period of not less than 7 years. Failure to comply with the Ordinance without reasonable excuse may be liable to a maximum fine of HKD100,000.

The Inland Revenue Department is empowered to request that any or all of the materials listed above be produced should it consider necessary.

Common Material Requested by CPA for Preparation of Financial Statement

  • Sales: Invoice, Goods return note, Receipt slip, Daily receipt record
  • Purchases: Invoice, Petty cash voucher, Payment slip, Check stub, Statement
  • General expenses: Invoice, Payment receipt, Check stub, Payroll
  • Transaction: Bank statements, Bank paid-in slip, Receipt, Check stub
  • Tangible assets: Purchase and sale agreement, Invoice and receipt, Check stub
  • Inventory: Purchase and sale agreement, Invoice and receipt, Check stub, Inventory lists

L. Accounting and Auditing Requirements

Proof-reading “the language of business”

Auditing of annual financial statements is required by the Companies Ordinance (enforced by Companies Registry) for every body corporate incorporated in Hong Kong.

Book-keeping Requirements

Proper books of account are necessary to give a true and fair view of the state of the company’s affairs and to explain its transactions with respected to the following:

  • all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place;
  • all sales and purchases of goods by the company;
  • the assets and liabilities of the company.

The books of account shall be kept at the registered address of the company, and shall at all times be open to inspection by the directors: Provided that if books of account are kept at a place outside Hong Kong there shall be sent to, and kept at a place in, Hong Kong and be at all times open to inspection by the directors such accounts and returns with respect to the business dealt with in the books of account so kept as will disclose with reasonable accuracy the financial position of that business at intervals not exceeding 6 months and will enable to be prepared in accordance with this Ordinance the company’s balance sheet, its profit and loss account or income and expenditure account, and any document annexed to any of those documents giving information which is required by this Ordinance and is thereby allowed to be so given. any books of account which a company is required by this section to keep shall be preserved by it for 7 years from the end of the financial year to which the last entry made or matter recorded therein relates.

Introduction of Audited Financial Statements

Statutory reports are required annually for companies incorporated in Hong Kong. The reports must contain audited financial statements for the current year, with corresponding amounts for the preceding year, including a balance sheet, profit and loss account, and a cash flow statement. Audited financial statements must be signed off by a Certified Public Accountant (CPA).

Audited financial statements is a reporting tool for the financial accountability of a business entities providing to investors, board members, and constituents.

The source documents for the audited financial statements are usually provided by the organization wishing to have an auditor prepare for a financial statement. This will often include a wide range of financial documents including information of Accounts Payable and Receivable, expense reports, budgets plan, and any other material related to the finance of a company. The aim of the accountant is to analyze, evaluate and cross-reference these various financial statements in order to provide a an audited financial statement that the organization can then present to interested parties.

Audited financial statements are often prepared on an annual basis, and are presented to persons or groups who have an ongoing interest in the organization. For businesses, the audited financial statements are often made available to investors (shareholders), upper level management, and the Board of Directors.

Financial Reports Used to Prepare Audited Financial Statements

The company needs to provide their income statement, balance sheet, and statement of cash flows along with financial documentation to support CPA for audit as follows:

  • Income statement = the P&L (Profit and Loss) and Statement of Operations. The income statement demonstrates how revenue earned (the top line) from the sales of products and services before expenses are taken out is transformed into the net income (bottom line), the end result after revenue and expenses are accounted for. The income statement documents whether the company made a profit or not during a reported period of time.
  • Balance sheet = statement of financial position. It is a summary of a company’s balances as of a specific date, usually the last day of the fiscal year. The balance sheet is composed of three parts: assets, liabilities, and ownership equity or net worth, with assets in one section and liabilities and net worth in the other, with the two sections balancing. The difference between assets and liabilities is a company’s net worth or equity. A company’s assets also equal their liabilities plus owner’s equity, which will show how the assets were financed, either by borrowing money (liability) or using the owner’s money (owner equity).
  • The statement of cash flows. It shows how changes in the balance sheet and income statement affect cash and cash equivalents. It also demonstrates operating, investing, and financing activities. The statement of cash flows helps investors and management determine the short-term viability of a company, specifically their ability to cover expenses.

 

Auditor’s opinion to an Audited Financial Statements

The CPA examines these three financial statements and their supporting documentation provided by the company and assesses the overall accounting principles used. From this information the CPA creates an audited financial statement which will include an opinion, either qualified or unqualified, about the nature of the financial documents. Audited financial statements usually include a section that is referred to as an opinion. It is the responsibility of the accountant to provide opinion on the audited statements:

  • an unqualified opinion (A “clean” opinion, auditor is in agreement with the methods used by the company to prepared for those submitted documents and thus this Statements is accurate and complete), or;
  • a qualified opinion (opposite of qualified opinion, auditor is NOT in agreement to), or;
  • an adverse opinion (auditor gives major exception or warning), or
  • disclaimer of  opinion (auditor refuses to give opinion, commonly known as”no opinion”).

Reason of rendering a Qualified Opinion or “No-Opinion”

The auditor is not in agreement with the methods used to prepare the supporting financial documents. This does not necessarily mean that the accountant thinks unethical question is found. However, it could mean that the auditor found instances where expenses should have been assigned to a different category, or there were technical errors found in line items.

For “no-opinon”, the auditor may mean that the supplied accounting records were insufficient to prepare for audited financial statements, or that there were a number of issues that must be addressed before the auditor would evaluate the accuracy of the information provided.

Generally, when an accountant declines to issue an opinion, there is a need for an organization to retool their internal accounting procedures, so they can operate according to the usual and proper accounting standards.

M. Dormant Companies Status

The official way for business owners to declare their company as “inactive”.

Definition of Dormant Company

“Dormant” is legal term that applies to Hong Kong private companies limited by shares. The company must have “no significant accounting transactions” during a financial year so that no entries in the company’s accounting records.

The costs incurred for the company to keep its incorporation statue do NOT count as significant accounting transactions.

Reasons for application for Dormant Status

It is a voluntary action of companies owners to apply for dormant status to their company, so there are numerous reasons to do so. Since a company can remain in “Dormant” as long as necessary, it is a perfect solution to hold its registered business name, asset, and intellectual property for protection from being registered by others.

The other common reasons are as follows:

  • Awaiting for future development
  • No plan in doing business in the coming year

The members’ duties of a Dormant Company

The Director(s) and Company Secretary are still responsible for handling and pay for the Annual Return, Tax Return, and Business Registration renewal on time. Meanwhile, they must report any changes in its registration  to the CR.

Advantage of making your Company in Dormant Status

As the company must have “no significant accounting transactions” during its dormant status, the cost of “maintaining the company” (e.g. effort in accounting and auditing) can be significantly reduced without having to wind up or apply and to de-register the company.

It is necessary for a dormant company to prepare audited accounts before completing the Profits Tax Return as required.

Application procedures for Dormant Status

A company will be eligible to apply for dormant status if it can fulfill all the conditions of the following:

  • Since the date of incorporation or any other specified date, it has not entered into what is known as a “relevant accounting transaction”, which is a transaction  to be entered into the company’s books of account including the receipt and expenditure of money and the sale and purchase of goods, assets and liabilities, but not including a fee which a company is required to pay by law, for example the annual business registration fee.
  • Prior to a company ceasing to be dormant, the directors must deliver to the CR a further statutory declaration that the company intends to enter into a relevant accounting transaction, at which stage the company will cease to be dormant and the normal requirements will apply again.

The company must pass a special resolution authorizing its directors to deliver to the Companies Registry. After CR approval, a statutory declaration to the effect that the company will be treated as a dormant company.

Cessation of Dormant Status

It is possible to cease anytime the dormant status by advising the CR with filled statutory declaration.

 

N. Company De-registration

Simply and voluntarily closing down a company in Hong Kong involves 4 steps.

Companies can be closed down either by “De-registration” or “Winding Up”. Although both the procedures will result in the dissolution of a company, the processes they entail are significantly different.

What is Deregistration / Striking Off?

Deregistration / Striking Off is a company’s voluntary application to its authorities of incorporation (in Hong Kong, Companies Registry is responsible authority) for cessation of its legal status  and thus doing business, and this application is irreversible. Since these government departments usually take time to process the application, a company is still required to file various returns before it is officially deregistered, or penalty will be imposed for late submission and may turn down the application.

The application requires various declarations be made by the applicant. Any person who knowingly and recklessly gives false or misleading information to the CR is liable to a fine and to imprisonment.

Before the application begin, it is important that all the liabilities of the company must be settled and all assets disposed/processed. In particular, any balance in the bank account of the company should be transferred out.

A company is highly recommended to seek professional consultation in the earliest stage of application since the deregistration process is more technical and affecting company’s property.

Is my company eligible for Deregistration?

First of all, your company must be a Hong Kong-incorporated private company and is defunct solvent.

Secondly, the application must be handled by the company itself, a director or a member of this that company.

Then, the company must fulfill all of the conditions as follows:

  • all the members agree to the deregistration;
  • no outstanding liabilities (including government penalty);
  • Either; (a) the company has never commenced business or operation, or (b) has stopped operation for business for more than three months prior to the application of deregistration;

For some categories of companies that are regulated by others ordinance, deregistration is not a mean to cease their business. The categories are as follows:

  • an authorized banking or financing institution by Banking Ordinance
  • an insurance firm as insurer by Insurance Companies Ordinance
  • a broker company by Securities and Futures Ordinance
  • a company having a subsidiary that falls within any of the above categories, and
  • a company that has fallen within any of the above categories at any time in the preceding five years

Request for a Notice of No Objection (NNO):

During the incorporation, a company must complete Business Registration at the same moment from Inland Revenue Department. On the stage of deregistration, IRD must be involved. The deregistration application must be accompanied by a written notice from the Inland Revenue Department stating that no objection is expressed to the company being deregistered. This notice will only be issued such a Notice if the conditions of the company are met as follows:

  • never commenced business, OR; has already ceased business and will not start / resume business in the future;
  • has disposed of all trading stock, landed property and securities, if any;
  • has no outstanding tax liabilities, fee, penalties incurred with relation, and court fees;
  • has no outstanding obligations including submission of returns and liability
  • has no unsettled inquiries from the IRD;
  • has no unsettled objections or appeals in respect of assessments already raised.

Summary of Deregistration Procedures:

  1. Clear out the company’s liability, asset, and bank accounts.
  2. Hold a board meeting to pass a resolution to strike off the company.
  3. Apply in writing to IRD for a Notice of No Objection for Deregistration of a Defunct Company (NNO).
    • Processing lead time: 4 weeks
    • Remark: The company must owe NO tax & payment to HK Government and NO outstanding tax returns;
  4. Apply in writing to the Companies Registry for de-registration of the company.
    • Processing lead time: up to 6 months
    • Remark: During the processing, the members still have the compliance obligation of the company.

O. Company Winding-up

Either Voluntary winding-up or Compulsory winding-up results in a company dissolved.

Winding-up is also sometimes referred to as liquidation. To purpose of company winding-up is to ensure that all the company’s affairs have been dealt with properly and to have the company dissolved.

Winding-up may either be compulsory or voluntary: based on the initiator of this action, we can classify the winding-up into the following:

  • Members’ Voluntary Winding-up
  • Creditors’ Voluntary Winding-up
  • Compulsory Winding-up by the court (The High Court of the Hong Kong Special Administrative Region)

For voluntary winding-up (a company winding-up by the company itself), no matter if the company is in financial difficulty or not, it may hold a general meeting of its shareholders to bring itself to an end by winding-up procedures. If a special resolution is passed for winding-up, the company may then apply to the Court for a winding-up order (via procedures similar to a creditor’s petition).

Alternatively, a special resolution that the company be wound up voluntarily may be passed. In that case, no winding-up order from the Court is necessary.

What are the effects of voluntary winding-up?

Upon the commencement of the voluntary winding-up, the company will cease to carry on business except that which may be required for the benefit of winding- up smoothly. The legal status and powers of the company will continue until it is dissolved.

Furthermore, any transfer of shares (except a transfer made by the liquidator or made with his/her approval), and any alteration to the status of the members of the company which is made after the commencement of a voluntary winding-up, will be void.

When the directors believe that the company will be able to pay its full debts within 12 months after the commencement of the winding-up, the members can carry out members’ voluntary winding-up.

For example, your company is in heavy debt and will not be able to continue business or pay off the debts you may consider the option of voluntary winding-up.

Relevant procedures of Voluntary Winding-up

  • A special resolution for voluntary winding-up to be passed by the shareholders.
  • A notice of the resolution has to be advertised in the Government Gazette within 14 days of the passing of the resolution.
  • The company has to actively call a meeting of all creditors. The notice for the meeting has to be advertised in the Government Gazette and in at least a Chinese and a English local newspapers.
  • The directors of the company have to make a full statement of the position of the company’s affairs, together with a list of creditors and the estimated amount of their claims, to be laid before the meeting. Resolution (concerning the details of the winding-up matter or process) may be passed at the meeting.
  • During the meeting, a liquidator may be nominated. Further, an inspection committee may be appointed to supervise the exercise of power by the liquidator.
    • The liquidator will deal with the affairs of the company. The liquidator will call further meetings of the company or creditors each year to account for his acts concerning the winding-up.
  • When the affairs of the company have been fully wound up, the liquidator will produce an account of the winding-up, and call a final meeting of the company and of the company’s creditors.

If no special resolution can be passed at a general meeting of shareholders, the board of directors may nevertheless pass a resolution that the company be wound up because the company cannot by reason of its liabilities continues its business. A declaration recording such resolution has to be signed by the directors and be delivered to the Companies Registry. Meetings of the company and of the creditors have to be summoned within 28 days of the delivery of such resolution to the CR. A provisional liquidator also has to be appointed upon the delivery.

Relevant procedure of Compulsory Winding-up

  • Issuing a written demand for debt repayment to the target company
  • Presenting a winding-up petition to the Court and the company (The winding-up proceedings should be deemed to commence at the time of presenting the winding-up petition to the Court.)
  • Court hearing for the petition
  • Granting of winding-up order by the Court
  • Meeting of creditors and other relevant parties
  • Appointment of liquidator
  • Realization and distribution of company’s assets to the creditors
  • Release of duties for liquidator
  • Dissolution of the company