Taxation of Hong Kong Companies: Hong Kong is well-known as one of the lowest tax regimes in the world.
Annual Statutory Audit and Profits Tax Compliance
Every Hong Kong limited company is obliged to conduct an annual statutory audit under the Hong Kong Companies Ordinance unless the limited company („the Company“) is in a dormancy status (official application is required). This is a continuing requirement entirely separate from the Companies obligations under the Hong Kong Inland Revenue Ordinance („IRO“), regardless of whether the Company’s business activities are conducted in Hong Kong and/or outside Hong Kong.
To conduct the statutory audit, the Company should appoint an independent auditor will has been a qualified under the Professional Accountant Ordinance and must hold a Practicing Certificate issued by the Hong Kong Institute of Certified Public Accountants to perform the service.
In addition, the company is obligated under the IRO to submit to the Hong Kong Inland Revenue Department („IRD“) the duly completed and duly signed Profit Tax Return (if received), a set of properly audited financial statements and tax computation before the prescribed deadline to make the tax filing valid unless the Company has not yet commenced any business operation worldwide since it’s incorporation or is in a dormancy status.
Failure to comply with the above requirements may result in a penalty being imposed by the Hong Kong government.
First Profits Tax Return
A Hong Kong company may receive its first Profits Tax Return issued by the IRD in around 18 months from its date of incorporation and it is due for submission to IRD along with the audited financial statements and related tax computation within 3 months from the issue date.
First Statutory Audit
A Hong Kong company is required by the Hong Kong Companies Ordinance to perform annual statutory us audits. It is highly recommended that the Company lodges annual audited financial statements and tax computation with the IRD even though no profit tax return has been issued for a particular year.
The Company´s first statutory audit will cover at most 18 months´ financial data for the period from the date of the Company´ s incooperation and to its first financial period end date adopted.
A normal audit engagement would require around 2 months to complete (subject to the sufficiency of the information/documents in the opinion of the auditor), further processing time may be required if bookkeeping service is also needed.
Offshore Claim (optional)
Under normal circumstances, the IRD would presume that a Hong Kong company’s business operation is located in Hong Kong and is therefore subject to Hong Kong Profits Tax.
Nevertheless, a Hong Kong company may launch an offshore claim application with the IRD claiming the fact that the company’s business operations are all located outside Hing Kong.
Since Hong Kong adopts is simple and low tax system, the company may consider paying Hong Kong Profits Tax, and apply for applicable deduction from the Double Tax Avoidance („DTA“) mechanisms available in the jurisdiction(s) that the company’s principal business operation is located.
However, if the Hong Kong company wishes to lodge an offshore claim application with the IRD, the Company is still required to submit the above-mentioned documents for compliance purposes.
In general, a Hong Kong company may apply to the IRD in writing for an offshore claim on its business profits exempted from Hong Kong profits tax together with its profit tax filing. However, special attention should be drawn to the fact that the application would be subject to the IRD´s review and approval. The IRD may look into the details of the company’s business operations, issue queries and request detail business records (e.g. contracts, invoices, shipping documents, business emails, travel itineraries of the related person etc.) from the Company to substantiate its offshore claim.
A Hong Kong company cannot state its offshore status (i.e. the profits derived from overseas business operations are exempt from Profits Tax in Hong Kong) without prior formal written application lodged with the IRD.
Upon successful offshore claim application (note: the IRD will not officially issue a letter of acceptance to the offshore claim), the profits generated from a Hong Kong company´s offshore business operations would not be subject to Hong Kong Profits Tax.
By the same token, no tax inductions would then be allowed for the associated expenses incurred for running such offshore business operations.
The Hong Kong company is not required to apply the offshore claim again every year if the first application is accepted by the IRD. The Hong Kong company is only required to make a declaration in subsequent years stating that its mode of operation remains the same as in the year under application if such offshore business operations continue. The IRD may normally issue enquiry letter(s) randomly for every 3 to 6 years to ensure that the Company’s business operation continues to qualify for exemption. In spite of the temporary exemption of annual tax filing, it is strongly advisable that the Company is still required to prepare its annual audited financial statements to comply with the requirements under the Hong Kong Companies Ordinance.
In consideration of the above, if your company needs to lodge an offshore claim application, such intention should be clearly indicated to auditors before commencement of the relevant compliance work.
Proper Record Keeping
Under section 51C of the IRO, every person carrying out a business in Hong Kong shall keep sufficient records (including but not limited to bank statements, banking advice, receipts, invoices, and contracts or agreements etc. in the English or Chinese language of its income and expenditures for a period of 7 years after the completion of the transaction to enable the assessable profits of such business to be readily ascertained. Any person who without reasonable excuse fails to comply with the requirements of the provision shall be guilty of an offense. Failure to comply with laws will result in a heavy penalty imposed under the IRO for each year of assessment.