Preparing and filing financial statements and tax returns and conducting an audit for a Hong Kong company. Service offer

Hong Kong companies are required to annually file an Annual Return (Form NAR1), a tax return and audited financial statements. Financial statements and tax returns are not publicly available.

The Companies Ordinance states that financial statements of all companies must be audited. Exemption from audit is only available to dormant companies. Preparing audited financial statements for a dormant company is not mandatory until the company has started doing business.

Every company must submit a special notice to the Inland Revenue Department within 30 days of the date of commencement of business. Otherwise, the company may be fined HKD 5 000 (~ USD 640) and its officers may be liable to imprisonment of up to 1 year. The business commencement date is the date of company signing its first contract or issuing its first invoice, or the date of the first transaction in the company’s account (payment of the company’s administrative expenses – invoices for its maintenance – alone does not make the company an active one).

A dormant Hong Kong company is only required to file a Profits Tax Return.

If, in the case of filing a nil report (when declaring no business activity), the company is later found to have been actually doing business, it will be necessary to resubmit reports for all the periods in which the company was active (for an additional fee). The company may also be held liable for providing incorrect information.

The first financial period of a Hong Kong company can last from 12 to 18 months from the date of incorporation. According to the established practice, the first year ends on the last day of the month preceding the month of incorporation (for example, if a company is incorporated on 19.10.2021, the first reporting period will be 19.10.2021 – 30.09.2022). Upon request of / agreement with the client, the end date can be changed to a date within 18 months of the company’s incorporation date. A subsequent change of the reporting date is not recommended as this significantly complicates the preparation of tax returns.

As for the deadline, the first financial statements are to be filed within 3 months of receipt of notice from the Inland Revenue Department, which is issued within 12 to 18 months of the company’s incorporation date.

A Hong Kong company does not incur a penalty for late filing of financial statements, however, audited financial statements data are necessary for filing of a tax return.

In order to prepare a proper set of documents, after the end of each reporting period we ask to provide information on the company’s activities in this reporting period:

1. bank account statements (in electronic form, if available);
2. contracts and agreements made in the reporting period;
3. previously made contracts and agreements which apply to the reporting period (for example, loan agreements made in the previous period);
4. other underlying documentation related to the activity in the period / disclosing the business of the company in the reporting period (invoices, statements of work performed, way bills, etc.).

It is enough to provide copies of the above documents.

The current legislation requires all Hong Kong companies that have subsidiaries to prepare and file consolidated financial statements.

Subsidiaries are companies that are more than 50% owned by another entity. There are cases where a company owned 50% or less is considered to be a subsidiary if it is controlled by the parent company. A company controls a subsidiary if the following conditions are met:

• a company has the power to govern the financial and operating policies of a subsidiary;
• a company has the power to appoint or remove the majority of the members of the board of directors of a subsidiary;
• a company has the majority of votes at meetings of the board of directors of a subsidiary.

To prepare consolidated financial statements, it is necessary to have the audited financial statements of a subsidiary. If a subsidiary cannot provide audited financial statements, its financial statements will be audited by Hong Kong auditors.

The tax period is the same for all Hong Kong companies, regardless of their incorporation date. A profits tax return is filed annually with the Hong Kong Inland Revenue Department and covers the period from 1 April to 31 March. After the end of the tax period (i.e. after 31 March), the Inland Revenue Department issues a tax return which the company must file within 1 month of the date of its issuance (i.e. from the date shown on the return).

Tax reporting consists of:

• a completed tax return,
• tax calculations,
• a copy of the financial statements signed by the director and the auditor.

If the tax return is not filed on time, the Inland Revenue Department issues a notice charging a fine of HKD 1 200 (~ USD 160).

If the tax return is filed no more than six months late, the fine increases (in practice, to ~ USD 350 – 360).

If the tax return is filed more than six months late, the Inland Revenue Department summons a representative of the company to court to explain the reasons for not filing a tax return. As a result of the hearing, the court may charge a fine of up to HKD 10 000 (~ USD 1 300) plus three times the amount of tax due in the reporting period.

If a company fails to file a tax return on time and has shown profit in its financial statements for the previous period, the Inland Revenue Department is entitled to charge provisional profits tax even if the company does not do business in Hong Kong (and hence is generally exempt from taxation of its profits). The reason for this is that the information that the company’s income is sourced outside Hong Kong must be annually confirmed by an auditor’s report.

If a company fails to file tax returns and financial statements, fails to pay the resulting fines, and its representative does not appear in court to explain the reasons, then the Inland Revenue Department will continue to prosecute. If a company is managed by a non-nominee director, that person will be held responsible for these violations.

In particular, the following penalties apply to the director:

1. Under section 80(1А) of the Hong Kong Inland Revenue Ordinance (IRO), a failure to comply, without reasonable excuse, with the requirement to keep accounting records as set out in section 51С IRO carries a fine of up to HKD 100 000. The payment of the fine does not exempt the company from filing the financial statements and returns with the authorities (a court order is issued compelling the director to make the filings within a period specified in the order).
2. Under section 80(2) IRO, a person who without reasonable excuse:

• makes an incorrect tax return,
• makes incorrect financial statements,
• gives incorrect information,
• fails to file a tax return within a time stipulated by law,
• fails to inform that they are subject to taxation in Hong Kong,

is liable to a fine of HKD 10 000 and a further fine of three times the undercharged tax.

If nominee services are used in a company, upon receipt by the director of any requests or court summons, he is obliged to provide the court with all financial information on the company and disclose the details of the beneficial owners.

Under current law, beneficial owners (as persons on whose instructions the company’s appointed directors act) are "shadow directors" and incur all the above-described penalties.

If a shadow director is not a citizen of Hong Kong, further development of the situation is possible through interaction between the Hong Kong authorities and the authorities of a foreign state. In particular, in the case of Russia, this is possible through the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958.

In addition to that, on 1 March 2018, the amendments to Hong Kong Companies Ordinance came into effect, introducing the Significant Controllers Registers. The Significant Controllers Register is not public and is not filed with any authorities. It is kept at the company’s registered office; it is available for inspection only to the company’s Significant Controllers and Hong Kong law enforcement officers during an inspection. The list of those authorized to inspect the register is given in the Ordinance and is exhaustive (the Inland Revenue Department is on this list).

Hong Kong has a territorial tax system, meaning that a Hong Kong company is only subject to 16.5% profits tax on its income derived from a Hong Kong source, that is to say:

Trading with Mainland China does not create tax in Hong Kong (subject to the restrictions described above). Therefore, in practice Hong Kong is widely used for delivery of goods to and from China.

To assess the company’s tax burden, we recommend seeking tax advice (which can be arranged upon request).

All Hong Kong companies are required to file an Employer’s Return of Remuneration and Pensions within 1 month from the date of issue by the Inland Revenue Department of the form to complete. A company receives its first form to complete and return within 12 to 18 months of the incorporation date, and thereafter – at the discretion of the Inland Revenue Department.

The Employer’s Return is submitted by all Hong Kong companies and shows whether or not they had employees during the period from 1 April to 31 March.

The fee for submitting this return is:

• USD 365 – if a company has no employees, a nil return is filed once;
• USD 550 – if a company has 1 employee (directors without salary or contract are not regarded as employees);
• USD 660 – if a company has 2 – 3 employees;
• 830 USD – if a company has 4 – 5 employees.

A company that has employees will submit the return annually.

Also, a notice of hiring an employee must be submitted to the Inland Revenue Department within 3 months of the date of signing the employment agreement. A similar notice must be given upon termination of employment. The fee for preparing and filing such a notice is USD 280.

The initial penalty for failure to submit the Employer’s Return on time is HKD 2 400 (~ USD 310), but the penalty may increase as the delay continues.

*The fees are valid at the date of sending of this offer.

**From USD 1 900 (the lowest cost of preparing reports and conducting an audit).