General tax and compliance in Hong Kong

Is it legal work?

The answer is no if the directors of the company understand the basics of compliance in Hong Kong early on, i.e. hire the right service providers to assist. You need to look for company secretary, accountant, auditor and tax representative. Many firms in Hong Kong provide all those services with one single point of contact. The right service provider is one which understands your company’s background (local or international) and can advise on duties and delays to comply (preparation of financial statements – consolidated or not, deadline for filing profits tax return etc.).

Unfortunately, some directors get it wrong which can expose their companies and themselves personally to civil and criminal liability (penalties, disqualification to act as director and in extreme cases personal financial liability and sometimes prison).
The examples below illustrate the key obligations of a company in Hong Kong.

In the instance you are raising funds or looking forward to selling shares in your company, or enter into a joint venture agreement, your company’s general tax and compliance will be scrutinised as part of the due diligence process. The identification of multiple compliance issues will ring bells with investors and often result in a withdrawal from negotiations and no investment or shares purchases.

KEY FINANCIAL AND TAX OBLIGATIONS

1. Every business in Hong Kong (incorporated or not) must keep record of its business (bookkeeping; preparation of management accounts).

Businesses who fail to take all reasonable steps to secure compliance may be liable to a fine of HK$300,000.

2. Every business in Hong Kong (incorporated or not) must appoint an auditor (Certified Professional Accountant or CPA) for each financial year and have financial statements prepared (audit of management accounts) to lay before the shareholders at the annual general meeting of the company.

◊ A director of a company who fails to take all reasonable steps to secure compliance with this duty commits an offence and is liable to a fine of HK$300,000.

3. Upon reception of the Profits Tax Return (PTR) from the Inland Revenue Department (IRD), every business in Hong Kong (incorporated or not) must within one month file its financial statements (audited) together with tax computation and possibly an application for off-shore treatment of its profits. It is the IRD practice to agree for a delay for the first financial year – if requested before the due date. The application for delay is usually rejected from the second year onwards.

The penalty is a HK$1,200 fine decided at a magistrate’s court hearing if no previous PTR has been filed showing a profit. 
If a previous PTR has been filed showing a profit, the taxation will be based on previous profits.

4. The delay to answer any enquiry from the IRD in application of exchange of information clause in tax information exchange agreements (TIEAs) or double tax avoidance agreements (DTAs) is usually one month. It is advised to appoint immediately the company’s tax representative (CPA) or a tax consultant with experience in international taxes to assist with the preparation of the answer. But this action itself will not suffice if the company is not up-to-date with the preparation of its accounting documents, and the audit of such (see points 1. to 3. above).

5. The requirements above apply equally to a company with no bank account or which has not commenced business. Evidence of no business provided by CPAs is conclusive, other evidences may not be satisfactory to IRD.

The penalty is a HK$10,000 fine decided at a magistrate’s court hearing, as well as court’s injunction to comply within a further delay with daily fines in case of non-compliance.

OTHER OBLIGATIONS

Other general tax and compliance obligations include the appointment of a company secretary and designated representative for the register of significant controller, having a registered office in Hong Kong, filing its annual return within 42 days of the anniversary date of the company’s incorporation, renewing the business registration, making payments into the mandatory provision funds for employees etc.

Depending on the business local regulations are also likely to apply, for instance regarding the sale of goods or the collection, use and storage of private data.

HOW WE CAN HELP

For new companies or directors aware of issues before any serious consequence arise, we are happy to make introductions to our trusted network of company secretaries, accountants, CPAs, tax consultant, data privacy or HR consultants.

We have direct connection with MLS Company Secretary Ltd (Hong Kong) and MLS Company Secretary Pte Ltd (Singapore) [LINK] which offer of company secretary services at the highest compliance standards, including:

 

  • regular internal review of files from a due diligences perspective;
  • bespoke compliance memorandum regarding tax filings and holding of annual general meetings (if necessary);
  • traditional or digital offer.

If necessary, we can also step in to assist in the selection and coordination of service providers to assist with regularisation. For instance, we have assisted a client in various steps to arrange for the regularisation of its legal, financial and tax situation prior to its deregistration. Details of our work are presented in the case study: Compliance regularisation.

OUR FEES

Fees vary depending on our input: free (nil) for making introductions to our trusted network, fixed fees for memorandum or legal opinions on specific questions or based on hourly rates for assisting and coordinating regularisation operations.