Accounts for a dormant company in Hong Kong audit exemption and filing rules
Understand accounts for a dormant company in Hong Kong: audit exemption, annual return relief, and record-keeping rules.
Accounts for a Dormant Company in Hong Kong: Exemption and Rules
A Hong Kong company with no significant accounting transactions may declare itself dormant under the Companies Ordinance (Cap. 622). Once declared, the company is exempt from the annual audit requirement. A private company is also exempt from delivering an annual return. Accounting records must still be kept for seven years. The distinction between dormancy and the reporting exemption under section 359 matters.
Hong Kong Dormant Company Audit Exemption
The primary benefit of dormant status is the exemption from the statutory audit. Under the Companies Ordinance, every Hong Kong incorporated company must have its financial statements audited annually by a practising certified public accountant registered with the Hong Kong Institute of Certified Public Accountants (HKICPA). A dormant company that meets the conditions is relieved of this obligation.
A company is dormant if it has no significant accounting transactions during the relevant period. A significant accounting transaction is one that the company would need to enter in its accounting records. The following are not considered significant accounting transactions: - Payment for shares taken by subscribers to the memorandum of association - Fees paid to the Companies Registry for incorporation or for filing statutory forms - Payment of a penalty for late filing of a return - Payment for the appointment of a secretary, auditor, or registered office
Any other transaction, receiving income, incurring an expense beyond the exceptions above, means the company is not dormant. It must appoint an auditor and have its accounts audited.
The audit exemption applies only to the financial year in which the company is dormant. If the company resumes business or has a significant accounting transaction, the exemption ceases for that year and subsequent years unless the company again becomes dormant.
Dormant Company Annual Return Exemption Hong Kong
A private company that has declared itself dormant is also exempt from delivering an annual return to the Companies Registry. The annual return is the document filed on Form NAR1 that reports the company's registered office, shareholders, directors, and secretary as at the return date. For a dormant private company, this filing is not required.
This exemption applies only to private companies. A public company, even if dormant, must still file its annual return. The exemption also does not apply if the company has been struck off the register or is in liquidation.
The company must still notify the Registrar of any changes to its directors, secretary, or registered office using the appropriate forms. Form ND2A for change of director, for example. The annual return exemption removes the periodic filing of Form NAR1. It does not remove the obligation to update the register when changes occur.
Hong Kong Dormant Company Accounting Requirements
Even with the audit and annual return exemptions, a dormant company must comply with the accounting records requirements under the Companies Ordinance. The company must keep accounting records that are sufficient to show and explain its transactions and to disclose its financial position with reasonable accuracy. These records must be kept for seven years from the date they are made.
The records may be kept outside Hong Kong. But the company must send to and keep in Hong Kong accounts and returns that disclose the financial position at intervals of not more than six months.
The directors must still prepare financial statements for each financial year. Because the company is dormant and exempt from audit, the financial statements do not need to be audited. The directors' report is also required unless the company qualifies for an exemption under the reporting exemption provisions.
Declaring Dormant Under Companies Ordinance Hong Kong
To obtain the exemptions, a company must formally declare itself dormant. The declaration is made by passing a special resolution of the members. The resolution must state that the company will be dormant from the date of the resolution or from a later date specified in the resolution.
Deliver a copy of the special resolution to the Companies Registry within 15 days. There is no specific statutory form for this; the resolution itself is the filing document. The resolution should be accompanied by the prescribed fee.
A company ceases to be dormant on the date it has a significant accounting transaction. The directors must then appoint an auditor within 21 days and prepare audited financial statements for the financial year in which the transaction occurred.
The declaration of dormancy does not affect the obligation to file an annual return if the company is a public company. For a private company, the annual return exemption applies automatically once the declaration is made.
Section 359 Reporting Exemption vs Dormancy
The reporting exemption under section 359 of the Companies Ordinance is a separate concept from dormancy. A company that qualifies for the reporting exemption may prepare financial statements under the SME Financial Reporting Framework and Standard (SME-FRF and SME-FRS) rather than full HKFRS. The disclosure requirements are reduced, and the directors' report may be simplified.
The reporting exemption does not remove the audit requirement. A company that qualifies for the reporting exemption must still have its financial statements audited unless it is also dormant.
The two exemptions can apply together. A dormant company that also meets the conditions for the reporting exemption may prepare its financial statements under SME-FRS and omit the audit. But the audit exemption comes from the dormant status, not from section 359. A company that is not dormant but qualifies for the reporting exemption must still appoint an auditor and have its accounts audited. The audit will be conducted under the reduced disclosure framework, but the auditor's report is still required.
Practical Steps for a Dormant Company
If your company has no significant accounting transactions and you wish to claim the exemptions, follow these steps:
- Confirm that the company has had no significant accounting transactions since the last financial year end or since incorporation.
- Pass a special resolution declaring the company dormant. The resolution should specify the date from which dormancy takes effect.
- File the special resolution with the Companies Registry within 15 days. Include the prescribed fee.
- Notify the Inland Revenue Department that the company is dormant. File a nil tax return (Form BIR51) and state that the company has no income.
- Keep accounting records for seven years, even if there are no transactions.
- If the company later has a significant accounting transaction, appoint an auditor within 21 days and resume normal filing obligations.
Ensure the registered office and director details are up to date. The annual return exemption does not remove the obligation to notify the Registrar of changes.
Consequences of Incorrect Dormancy Declaration
If a company declares itself dormant but later has a significant accounting transaction without appointing an auditor, the directors may be in breach of the Companies Ordinance. The company may also face penalties for late filing of annual returns if the dormancy declaration was not properly made.
The Companies Registry may query a dormancy declaration if the company appears to have had transactions. The declaration must be accurate. The company must genuinely have no significant accounting transactions.
If the company resumes business, the directors must file the annual return for the period in which the company was dormant, even if the return date has passed. The late filing fee may apply. Regularise the position as soon as possible.
Summary of Obligations for a Dormant Company
| Obligation | Requirement for Dormant Company |
|---|---|
| Audit | Exempt, provided no significant accounting transactions |
| Annual return (private company) | Exempt |
| Annual return (public company) | Required |
| Accounting records | Must be kept for seven years |
| Financial statements | Must be prepared but not audited |
| Directors' report | Required unless reporting exemption applies |
| Notification of changes to directors/secretary/RO | Required |
| Filing of special resolution declaring dormancy | Required within 15 days |
The exemptions for a dormant company reduce compliance costs. They are conditional on the company remaining genuinely dormant. Any significant accounting transaction ends the dormancy and restores the full audit and filing obligations.
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