Tax and compliance for a Hong Kong company with no Hong Kong operations

Hong Kong Company with No Hong Kong Operations: Tax and Compliance

A company incorporated in Hong Kong must comply with the Companies Ordinance (Cap. 622) even if every business activity takes place outside the territory. It must maintain a registered office and company secretary in Hong Kong, file annual returns with the Companies Registry, and prepare audited financial statements. The tax treatment may differ if the company can successfully claim that its profits are sourced entirely offshore.

Hong Kong Company No Business in Hong Kong

A Hong Kong company that carries on no business in Hong Kong is still a legal entity subject to the full requirements of the Companies Ordinance. It must have a registered office address in Hong Kong, at least one director who is a natural person (or a corporate director if permitted by the articles), and a company secretary who is ordinarily resident in Hong Kong. These requirements apply regardless of where the company's actual operations occur.

Statutory records must be maintained at the registered office or a prescribed location. Those records include a register of members and a register of directors and secretaries.

The Companies Registry does not exempt a company from filing annual returns simply because it has no Hong Kong operations. Form NAR1 must be filed every year within 42 days of the company's return date, together with the prescribed fee. Failure to file attracts escalating late filing fees and, ultimately, prosecution.

Hong Kong Company Offshore Claim

Hong Kong's profits tax system is territorial. Only profits arising in or derived from Hong Kong are assessable to profits tax. A Hong Kong company with no Hong Kong operations may therefore claim that its profits are sourced outside Hong Kong and are not subject to Hong Kong profits tax. This is commonly referred to as an offshore claim.

The Inland Revenue Department (IRD) examines each claim on its facts. No statutory provision automatically exempts offshore profits. Instead, the IRD applies the "operations test" derived from case law: the source of profits is determined by where the operations that generated the profits took place. For a trading company, the relevant operations are the negotiation and conclusion of contracts. For a service company, the relevant operations are the performance of the services.

The IRD has published Departmental Interpretation and Practice Note No. 21 (DIPN 21) which sets out its approach to offshore claims. The burden of proof lies with the taxpayer.

Hong Kong Company No Physical Presence

A Hong Kong company with no physical presence in Hong Kong must still satisfy the statutory requirements for a registered office and company secretary. The registered office must be a physical address in Hong Kong, not a post office box. The company secretary must be an individual ordinarily resident in Hong Kong or a corporate body that has its registered office or place of business in Hong Kong.

The company may use a professional services firm to provide its registered office and company secretary. This is common for companies that operate entirely offshore. Directors and shareholders may be located outside Hong Kong. The company must maintain a register of directors and a register of shareholders that are updated whenever changes occur.

The IRD may scrutinise a company that claims to have no physical presence in Hong Kong. The absence of a physical presence does not automatically mean the company has no Hong Kong operations. The IRD will look at where the company's management decisions are made, where contracts are negotiated and signed, and where the company's bank accounts are operated.

Assessable Profits and the Offshore Claim

If the IRD accepts an offshore claim, the company's assessable profits for Hong Kong profits tax purposes will be nil. The company must still file a tax return (Form BIR51 for a corporation) each year. The return must include a statement that the company claims its profits are not chargeable to profits tax because they are derived from outside Hong Kong. The IRD will then review the claim and may request supporting evidence.

The company must also maintain a business registration certificate. Even if no tax is payable, the business registration fee must be paid annually. The IRD issues the business registration certificate upon application, and it must be renewed every year.

Evidence for Offshore Claim

The IRD requires detailed evidence to support an offshore claim. The company must demonstrate that the operations that generated the profits took place outside Hong Kong. For a trading company, this means showing that contracts were negotiated and concluded outside Hong Kong, that purchase and sale orders were accepted outside Hong Kong, and that the goods were never physically in Hong Kong.

For a service company, the evidence must show that the services were performed entirely outside Hong Kong. For a manufacturing company, the evidence must show that the manufacturing process took place outside Hong Kong.

The IRD may request the following documents: - Contracts, invoices, and purchase orders - Correspondence with customers and suppliers - Board minutes and resolutions - Bank statements showing the flow of funds - Evidence of the location of employees and their activities - Evidence of the location of physical assets

Maintain these records for at least seven years after the end of the relevant year of assessment.

Statutory Audit and HKFRS

A Hong Kong company must prepare audited financial statements in accordance with Hong Kong Financial Reporting Standards (HKFRS) or the applicable financial reporting framework. The audit must be carried out by a certified public accountant registered with the Hong Kong Institute of Certified Public Accountants.

The audit requirement applies regardless of whether the company has any Hong Kong operations. The auditor will examine the company's financial statements and express an opinion on whether they give a true and fair view of the company's financial position. The auditor will also consider the company's offshore claim and may require additional evidence to support it.

The audited financial statements must be filed with the Companies Registry together with the annual return on Form NAR1. The Companies Registry does not assess the tax treatment of the company; it only checks that the financial statements are properly prepared and filed.

Annual Return and Form NAR1

Form NAR1 is the annual return that every Hong Kong company must file with the Companies Registry. The return must be filed within 42 days of the company's return date, which is the anniversary of the company's incorporation. The return includes details of the company's registered office, directors, company secretary, shareholders, and share capital.

The fee for filing Form NAR1 depends on the company's share capital. Late filing increases the fee. The Companies Registry publishes a fee schedule on its website.

File a notification of any changes to directors or company secretary on Form ND2A within 15 days of the change.

Business Registration Certificate

Every Hong Kong company must hold a valid business registration certificate issued by the Inland Revenue Department. The certificate must be renewed annually. The fee for renewal is HK$2,150 for each business (as of the verified date). Display the certificate at the registered office.

The business registration certificate is separate from the company's incorporation certificate. Apply for the certificate within one month of commencing business. For a company with no Hong Kong operations, the "commencement of business" is the date of incorporation. Obtain the certificate promptly.

Directors and Shareholder Requirements

The Companies Ordinance requires every Hong Kong company to have at least one director. A private company may have a corporate director, but at least one director must be a natural person if the company has no corporate director. The director may be resident anywhere in the world.

The company must also have at least one shareholder. A shareholder may be an individual or a corporation. The shareholder may be resident anywhere in the world.

Maintain a register of directors and a register of shareholders. Update these registers whenever a change occurs. Keep the registers at the company's registered office or a prescribed location.

Place of Business and Registered Office

The company's registered office is the official address for service of documents. It must be a physical address in Hong Kong. The company may use a professional services firm as its registered office address.

The company does not need a physical place of business in Hong Kong if it has no Hong Kong operations. The registered office must be accessible during business hours for the service of documents.

Distinction From a Dormant Company

A dormant company is one that has no significant accounting transactions during the period. A company with no Hong Kong operations is not necessarily dormant. It may have significant transactions outside Hong Kong. The distinction matters because a dormant company may be exempt from audit if it meets the conditions set out in the Companies Ordinance.

A company with no Hong Kong operations that is actively trading outside Hong Kong is not dormant. It must prepare audited financial statements and file them with the Companies Registry. The offshore claim relates to the tax treatment of its profits, not to its accounting obligations.

Inland Revenue Department and Tax Return

The Inland Revenue Department issues tax returns to Hong Kong companies each year. File the return within one month of the issue date, unless an extension is granted. Declare the company's assessable profits and compute the tax payable.

If the company claims that its profits are sourced outside Hong Kong, state this in the tax return and provide supporting evidence. The IRD will then assess the claim. If the claim is accepted, the company will receive a notice of assessment showing nil tax payable.

The IRD may issue a protective assessment if it is not satisfied with the evidence provided. The company may then object to the assessment and provide further evidence.

Summary of Compliance Obligations

A Hong Kong company with no Hong Kong operations must: - Maintain a registered office in Hong Kong - Appoint a company secretary ordinarily resident in Hong Kong - File Form NAR1 annually with the Companies Registry - Prepare audited financial statements in accordance with HKFRS - Hold a valid business registration certificate - File a tax return with the IRD each year - Maintain statutory registers and records - Notify the Companies Registry of any changes to directors, secretary, or registered office

The offshore claim for profits tax is a separate matter that requires careful documentation and evidence. Seek professional advice before making an offshore claim.