Guide to Compliance and Audit in Hong Kong
Though generally very straightforward, Hong Kong limited liability companies are legally obligated to observe all compliance procedures or may be subject to fines. According to the Companies Ordinance, the company secretary is responsible for overseeing compliance efforts and the company director(s) must ensure that the secretary is fulfilling his/her duties. Compliance responsibilities primarily concern the annual returns to the Inland Revenue Department and Companies Registry, maintenance of company information, and the filing of company changes.
Annual Return to the Inland Revenue Department
Hong Kong companies must file an annual return with the Inland Revenue department that includes their Profits Tax Return, a record of audited accounts, the balance sheet, and a brief report on the computation detailing how taxable profits were derived from accounting profits.
Annual Audit of Accounts
Limited liability companies must submit records of their audited accounts with the Inland Revenue Department. A profit and loss account (P&L) and balance sheet must be audited by Hong Kong certified public accountants. The auditor may be in no way affiliated with the company.
Hong Kong limited companies must prepare and file a director’s report in conjunction with audited accounts that covers the business’s affairs from the previous financial year. The contents must include:
A fair overview and assessment of the company’s business including an analysis using financial key performance indicators, the company’s compliance with the laws and regulations that have a significant impact on the company, an account of the most critical relationships with its employees, customers, and suppliers to the company’s success
- An assessment of the company’s primary risks and uncertainties
- A description of the important events affecting the company in the previous financial year
- A projection of the future development and trajectory of the company’s business
An employer’s return, issued by the Inland Revenue Department should be filed every financial year. The return reports on the remuneration of employee’s including wages, salaries, pro rata annual payments, and commissions. The return must be filed within one month of the issue date.
Other Financial Details
Where applicable, a Hong Kong CPA, will advise you of other financial details that must be reported. Depending on your business, these often include the following:
- The particulars of extraordinary gains or losses
- Schedules of paid or payable interest
- Changes in methodology of valuation of stock
- Bad debt provisions and write-offs
- Reserves and provisions
- Capital expenditure
- Capital assets sold
- Expenditure of scientific research
- Refurbishment and renovation of commercial or industrial facilities
- Service or management expenditures
- Payments to contractors or subcontractors
Annual Return to Companies Registry
The Companies Registry requires the submission of an annual return filing with the following items:
- Details of share capital
- Names and addresses of all Directors
- Names and addresses of Registered Shareholder
- Name and Address of Secretary
- Registered Charges (such as mortgage)
Annual General Meeting
Annual General Meetings may be held any time of the year. However, the interval between meetings may not exceed 15 months. The first Annual General Meeting must be held no later than 18 months after incorporation. The annual general meetings must be held each financial year rather than calendar year (according to an update in the Companies Ordinance). In the meeting, the directors must verify that the P&L statement and balance sheet are compliant with Hong Kong’s Financial Reporting Standards. At a general meeting, a company may pass a resolution to not hold Annual General Meetings. The resolution must be submitted in order for the Annual General Meeting requirement to be waved.
Maintenance of Company Records
Records may be maintained using paper-based or computer-based methods. All companies are required to maintain records of the following information:
Minutes Minutes of company meetings of directors, members, committees of directors, committees of officers, and committees of members should be recorded and maintained at the registered office.
- Resolutions Copies of all written resolutions must be maintained.
- Bookeeping The books of account recording receipts and payments or income and expenditure.
Documentation to Support Financial Records Documentation verifying entries into the books of account such as vouchers, bank statements, invoices, receipts, etc.
- Record of Assets and Liabilities
Detailed Record A daily record of all sums of money received and spent along with supporting documentation of the receipts or payments.
- Lists of debtors and creditors
For businesses that deal in physical goods, purchases and sales records must be maintained. Invoices must detail goods, including their quantity and value, and the identities of buyers or sellers.
Filing Company Changes
Note that in the event of the passage of any resolution, be it special or regular, a signed copy of the resolution should be filed with the Companies Registry.
Name Change In order to change the name of a company, a special resolution must be passed requiring the approval of shareholders. The new name along with a record of the resolution should be sent to the Companies Registry.
- Changes to Articles of Association Most changes to the Articles of Association require a special resolution.
Director(s) Companies must file any changes, additions, or reductions to the list of directors with the Companies Registry within 14 days. A company is not required to have more than one director and nominee directors are permitted. However, if there is only one director, it may not be the same person as the secretary.
Resolution The passing of a resolution by the board of director or shareholder should be filed with the Companies Registry within 15 days.
Company Secretary Any change in the company secretary must be filed with the Companies Registry within 14 days of the change.
- Office Address Changes in office registration should be filed with the Companies Registry within 14 days.
Statutory Books Any change in location of the company’s statutory books should be filed with the Companies Registry within 15 days.
Share Capital An increase in the company’s registered share capital should be filed with the Companies Registry within 15 days.
Issuance of New Shares Any issuance of new shares should be filed with the Companies Registry within 8 weeks and sent along with payment of the required capital fee on the amount of any premium over the nominal value at which the shares are issued. Any increase in the company’s share capital requires the approval of the shareholders. The company’s Articles of Association usually allows for increasing the company’s share capital through the passage of an ordinary resolution.