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Inactive company tax filing and audit

Under the Companies Ordinance, all limited companies registered in Hong Kong are required to submit their financial statements and tax returns to the Inland Revenue Department annually for tax assessment purposes, and limited companies are required to engage an auditor to conduct an audit once a year to ensure that the company's tax returns comply with generally accepted accounting principles.

However, if a company has no activity, can it be considered an "inactive company" (or "dormant company") and thus exempt from the tax filing process? First, an inactive company must meet the following two conditions:

No accounting-related transactions are recorded

Not have any bank accounts

In other words, a company is not considered inactive or dormant if it has made any transactions or has a bank account during the fiscal year. Under the Companies Ordinance, companies other than inactive or dormant companies are still required to prepare and submit financial statements annually for tax purposes and to engage an auditor to conduct an audit.

What is "zero filing"? Does the absence of business necessarily mean "inactive company"?
If a company does not have any business during a fiscal year, it can apply to the IRS for exemption from accounting, auditing, and taxation, which is called inactive reporting (zero reporting). If you do not meet the requirements, you will have to follow the normal procedures for accounting audits and filing financial statements.

While it is true that inactive or dormant companies can file "zero returns," under the IRO, a company is considered to be in business, i.e., subject to annual tax filings and audits, whether overseas or in Hong Kong, if either of the following conditions is met:

  1. Making investments (including stocks, bonds, industrial investments, etc.)

  2. Holding (control of a company by holding a certain number of shares in that company)

  3. Deployment of the group's current funds

  4. Hiring employees

  5. Leasing of office space

  6. Any transaction (including bank transactions)

If a company does not qualify as an inactive or dormant company and still files a "zero return", the IRD will conduct a field audit and investigation of the company. If a company is found to have made a false declaration, it will be prosecuted and the amount owed will be recovered, and a fine of HKD 10,000 and 3 times the tax amount will be imposed upon conviction. If the company deliberately evades tax, it is liable to a fine of HKD 50,000 and imprisonment for 3 years.

Don't you have to do anything else if you "file zero return"? Watch out for a fine of 300,000!
Under section 373 of the Companies Ordinance, Cap. 622, there is still some work to be done because under the Companies Ordinance, companies are required to comply with the following regulations:

(1) The company shall keep accounting records that comply with subsections (2) and (3).

(2) The accounting records shall be sufficient to--

(a)show and explain the transactions of the company;

(b)disclose with reasonable accuracy the financial position and financial performance of the company at any time; and

(c) enable the directors to ensure that the financial statements comply with the Ordinance.

(3) The accounting records shall, in particular, contain-

(a) a daily record of all sums of money received and expended by the company, and the matters to which such receipts and expenditure relate; and

(b) a record of the assets and liabilities of the company.

(4) Submission of the Company's audit report (commencing April 2023)

(5) If subsection (1) does not apply in relation to a subsidiary undertaking of the company, the company shall take all reasonable steps to ensure that the attachment enables the subsidiary undertaking to keep accounting records that are sufficient to enable the directors of the company to ensure that the financial statements required to be prepared under Subdivision 3 of Division 4 comply with this Ordinance.

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