Dormant Company Audit in Hong Kong

Are you looking for a way to pause your company temporarily for a specific reason but not shut it down? Do you like to take time to figure out anything first before taking up the cost of establishing the business? Then, all you need to know is a Hong Kong Dormant Company. 

When you control single or multiple organizations, in some situations, you may want to suspend the business activity for a while or drawback to take a rest after a trading session. Either way, running a dormant company may be suitable for your purpose. This article will assist you in understanding the essence of a dormant company and whether a dormant company audit is compulsory in Hong Kong.  You are at the right place and here I explain what the dormant company in Hong Kong really about.

What Is A Dormant Company?

Dormancy Company refers to that type of a company which did not carryout any kind of accounting transactions in the current year which is legally approved to stop its business operations temporarily but the company is still registered as an active company.

The majority of companies in different countries apply for inactive status or dormant status to stay free from the expenditures of annual returns, hold annual general meetings, hire auditors, and file audited reports.

To get an overall view of the idea that a company is dormant under the financial jurisdiction of Hong Kong, the person will have to comprehend what is meant by the lack of accounting activities. Specifically, the accounting transaction is the element that is being recorded in an accounting record. The Companies Act permits a company to register as dormant with ordinary maintenance expenses as low as possible but the minimum allowance should not be less than a year without accounting transactions.

This change in accounting transactional mix had made the start-up cost allocation much easier and in a way had reduced the company overheads. In truth, an authentic company that was dormant in Hong Kong has actually registered its non-transactional” status with authorities. This is to say that it will only get into accounting operations that are permitted by the By Law and is therefore not supposed to get into transactions that are foreign to the By Law. Similarly, a dormant limited company in Hong Kong will not be required to perform certain domains which will elicit the privilege of certain rights.

Read Declaring Dormant Company Status in Hong Kong

Benefits Of Dormant Company In Hong Kong

The primary advantage of the dormant status is that it lets a company keep the minimum charge of maintaining a company. Subsequently, the company will no longer be subjected to other annual regulatory obligations. And even though the company is going dormant in that one year, it needs to renew its status for the years that it is active.

Here are some of the benefits of being a dormant company in Hong Kong : 

Safeguard Reputation Of The Company

The choice of a dormant company or incorporation may be grounded on various sound reasons. Once your company has been registered as Hong Kong’s dormant company, the inactive status can also mean brand appearance and protection of your trademark.

To Hold Specific Assets

The majority of investors probably keep some of these assets as a part of a well-balanced portfolio, with the most conservative investors having the bulk of these assets in their formation for guaranteeing capital preservation. By declaring itself as a dormant company in Hong Kong, you can enjoy the opportunity to safeguard intellectual properties and certain assets. 

To Purposefully Cease The Company’s Activities.

If you currently don’t have a project pipeline, then you have the dormancy to cut down on the expenses of the organization. It will be a good help, mainly, when you have no legal formalities to fulfill. 

To Maintain The Company’s Status As A Legal Entity

Keeping a company operational at minimal cost can be challenging. However, dormancy offers an easy solution. By transitioning into a dormant state, your company becomes exempt from various legal obligations. Below are some of these exemptions outlined by the Ordinance:

1. Submitting the annual return 
2. Organizing annual general meetings 
3. Drafting audited financial statements and appointment or dismissing or replacing auditors 

To Fullfill Other Essential Needs

You can stop the operation to a certain extent when some conditions are met. However, the dormant status of the company lets you start up again any time you choose from the moment you are ready to do so by the existing company without going through the dissolution process. It speeds up the procedure of starting a new business from scratch.

How Can A Company Request Dormancy Status In Hong Kong?

These facilities, together with Hong Kong’s low taxation policy, help entrepreneurs build up business New Ventures in Hong Kong. Whereas in most cases firms shut down for more specific reasons. Then this is where the company needs to apply for dormancy.  

The company should allow for a special resolution that permits the Director(s) to fill in the Director(s) with the Registrar of Companies. The document relays the statutory specification that the company will be perfect in its current form. The directors are required to generally lodge the special resolution with the Companies Registry within 15 days from the date the resolution was passed.

In Hong Kong, the sole criteria that identify the dormant company is the “no relevant accounting transaction” from the date of its creation or any other date that is specified. 

A relevant accounting transaction is defined to include: 

• All receipts and expenditures whatsoever made by the company with reference to the subjects in which receipts and expenditures are stated.
• All the sales and purchases of the company’s services.
• The company’s assets and liabilities.

With all the transactions stopped there are no deals or money operations among dormant companies. The organization has no choice but to pay out under the rules. The organization’s managers will be still performing their roles related to their particular occupations and also ensure conformity with requirements for fulfillment during the dormant period.

It will not always be true that all businesses in Hong Kong will transform into dormant companies. That is the case of a particular kind of business that sometimes is not allowed to claim dormancy. The Ordinance is not enforced for a company that is not a private company. Here are some companies that are not allowed to declare dormancy : 

• Authorized institutions according to the Banking Ordinance
• A trader recognized under the Commodities Trading Ordinance.
• A business that belongs to one of the eight groups listed above and has a subsidiary 

However, there are many other kinds of companies that are not allowed for dormancy.

Regulations And Requirements For Dormant Companies

Regulations that are meant for keeping a balance of peace and dignity in the workplaces regardless of the job types are indispensable. Just like dormant business entities, statutory accounts detail the attitudes of their officers, exemptions from audits and reporting, accounting transactions, and annual examination compliance provisions.

The Duties of Officers Within a Dormant Company

After the company gets into the state of dormant company, the company operates on a cost-efficient basis. The required compliance includes the exemption from annual return filing, annual general meeting holding, the appointment of auditors, and preparing financial statements that have been audited.

Although the company is on hold, the officers of the dormant company in Hong Kong securing the provisions and performing the duties in line with the Companies’ Ordinance is still of great significance. They have the majority of roles as that of a regular firm.

The directors and secretaries are required to run the corporation on behalf of the shareholders or members. They conduct meetings and ensure the submission of the documents required and other documents to the Companies Registry. 

The following is the list of minimum requirements, which can be kept by a dormant company. According to the laws, the dormant company must follow these:

• Ensure the company has a minimum of one individual director, one shareholder, a designated company secretary, and a registered address;
• Notify the Companies Registry of any changes to the company’s structure and details of its officers;
• Renew the Business Registration Certificate (BRC) when necessary
• File the Profits Tax Return (if any) to the Inland Revenue Department.

Dormant Company Audit Exemption And Reporting Exemption

A dormant company in Hong Kong cannot have any accounting or financial transactions except for activities related to the payment of fees as required by the Companies Ordinance.

Each year, Hong Kong limited companies must go through accounting and auditing by a CPA. The Companies Ordinance in Hong Kong includes a provision that allows the company to declare itself as dormant and continue the status of the company unchanged and for a minimum maintenance cost as long as it does not have accounting transactions. 

Essentially, a company’s audit exemption grants it an exemption from the requirements to prepare the financial statements and audit. If the accounts of the company have been dormant since its corporation or the end of the fiscal year, the company is exempted from being audited. Having the status of the dormant company will provide the company with the freedom from financial reporting disclosure, as well as public accountability designations.

Relevant Accounting Transactions

Various types of transactions take place within a company, typically involving the exchange of cash. However, for a dormant company in Hong Kong, the concept revolves around the absence of relevant accounting transactions. Despite this, certain mandatory transactions are required to be undertaken by company officers.

As per Section 2 of the Companies Ordinance, an accounting transaction refers to a transaction necessitated by Section 373 to be recorded in the company’s accounting records. This includes activities such as the receipt and expenditure of money, assets, and liabilities. Transactions mandated by the Ordinance for the company to pay are excluded, such as the payment of business registration fees.

Transactions like service fees charged by a bank or interest credited to the company’s account would be considered accounting transactions. Engaging in such transactions would render the company ineligible to apply for dormant status.

Companies That Cannot Claim Dormant Status

Not all Hong Kong companies are allowed to be a dormant company. In Hong Kong, a company that is not private or falls under at least one of the following categories cannot claim a dormant status : 

• Financial institutions according to the Banking Ordinance such as banks: 
• Insurance officer according to the Insurance Companies Ordinance
• The Mandatory Provident Fund Schemes Ordinance trustee 
• A corporation that possesses the Securities and Futures Ordinance license 
• A registered dealer under the Commodities Trading Ordinance
• A Hong Kong company or any registered non-Hong Kong company that
  • is has a controlling entity relationship with an intermediary company such as a licensed corporation or registered instruction) or 
  • holds intermediary assets for clients in Hong Kong as defined in the Securities and Futures Ordinance, as Hong Kong’s legal framework.
• A licensed leveraged foreign exchange trader as per the Leverage Foreign Exchange Trading Ordinance 
• An established company that falls under any of the above categories at any time within the past five years.

Ceasing Of The Dormant Status

If you do not need a dormant company anymore, it is compulsory to validate it officially. If you want to restart your company and the business is operating normally, or if there is a transaction taking place in the company then you are still required to prepare the financial report.

Once you cease the dormant status, it will function like any normal business. You can decide to revoke the dormancy status and to have it re-activated, by following the same procedure as the one you used when applying in the first place.

After the dormant company enters a deal in the transaction, the company ceases to be dormant. This exemption of the annual return processing is no longer effective starting at the moment of the date of the accounting transaction.

For the company to be free from the dormant status, one special resolution should be passed indicating that the company proposes to adopt in an accounting transaction and the directors confirming the same should be forwarded to the Companies Registry for registration. Then, the company will restart its active status again. 

Ultimately, the shareholders are able to make this decision and they may vote to cancel the business if they conclude that it is no longer likely to succeed. This way, the legal entity will be de-registered permanently and removed from the register. This can be done by a voluntary de-registration or voluntary liquidation if the business is debt-free.

The Annual Compliance Obligation For A Dormant Company In Hong Kong  

To sum up, dormant status does not imply that you will be considered for an absolute release of all types of responsibility. 

A dormant company in Hong Kong means that you are allowed to simply lighten the burden of each detail and keep all the accounting records at request. The only option for you is to go on with your business while maintaining low operating costs.

There are some procedures to complete and conditions to meet in order for your business to continue operating as a legal entity. Some of these include:

• There should be a registered office and at least one director, one shareholder, and a qualified company secretary such as a TCSP License holder. 
• The Registrar must be accordingly updated with all the changes in management officials as well as in the company’s registered office.
• The operation of the business will require to be registered and pay the required fee to the government each year to renew the business registration certificate.
• The Profits Tax Return should be filled if the Inland Revenue Department

Read Understanding the concept of a Dormant Company and Shelf Company

How FastLane Group Can Help?

Fastlane Group, as a reputable company secretary firm, can assist in navigating the process of applying for and managing dormant company status in Hong Kong. They ensure compliance with regulatory requirements, handle necessary filings with the Companies Registry, and provide expert guidance on maintaining legal entity status while minimizing operational costs. Fastlane Group’s expertise streamlines the process, allowing businesses to focus on their strategic goals. Contact us now.