Once profit occurs, companies are required to file tax returns. However, if a private company has not operated in the past financial year, it could declare as a "dormant company", then apply for "zero declaration" through Inland Revenue Department (IRD) to be exempted from tax paying. Though, a company must meet a series of conditions before it can be regarded as a dormant company. The qualification and process might be even more harsh than normal tax filing. To know how to be exempt from tax returns, please continue to read this article.
All limited companies registered in Hong Kong have to file tax for the profits generated in Hong Kong every year, and submit the audited financial statements together with the profits tax form to IRD; while the sole proprietor of a unlimited company only needs to fill in the tax return for individuals.
What is a "Dormant Company"?
According to the IRD, a company that has no business operation, no accounting transactions, and no assessable profits in a financial year could be regarded as a "dormant company” and is exempted from tax returns.
Can a company ignore tax season just because it generates no profit then? In fact, no, it cannot. A company is required to meet the following conditions in order to be a "dormant company":
- Possess no corporate bank account, or no capital flow in the account,
- No accounting, transaction and any business deal records; or
- Possess relevant record indicating "no business operation occurs" in government departments.
Besides, according to the "Inland Revenue Ordinance", once a limited company conducts any of the following activities, it will be regarded as "commencement of business" and immediately disqualified for "zero declaration":
- Stock/bond/industrial investment
- Investment holding
- Fund allocation
- Hiring staff
- Leasing office
- Authorization to use a trademark design or patent in Hong Kong
- Any accounting transaction occurs in company bank account (does not include transactions made of any fees imposed on the company by the regulations)
How to Become a Dormant Company?
Aside from fulfilling the aforementioned conditions, companies are also required to pass a special resolution declaring that it will become dormant, and submit the resolution to the Companies Registry.
The company is a dormant company as from:
- The date of delivery of the special resolution to the Companies Registry; OR
- any later date that is specified in the special resolution.
The requirements could be quite demanding, interested companies should thus conduct the application for "zero declaration" within the month receiving the tax return form. The IRD may also check the accounting details of the past 7 years of the applicant company, including bank messages and customs records.
If the company fails meeting the "zero declaration" conditions, or is suspected of deliberate tax evasion during review, the company's board of directors would face fines or even imprisonment upon conviction.
Benefits of Being a Dormant Company
After successfully declaring the company as dormant, it can maintain its existence at the minimum cost, its management is exempted from the following duties:
- Annual return submission
- Preparation of financial statements
- Annual shareholders meeting
Responsibilities and Obligations of a Dormant Company
Even with a partial waiver of liability, the dormant company still has to finish the following tasks:
- Pay the business registration fee on time
- Appoint a company secretary
- If you receive a profit tax return, fill it out within one month and apply for "zero declaration."
The company is still required to deliver an annual return for the year in which it declares itself to be dormant if the effective date on which the company becomes dormant falls after the 42nd day after the anniversary of its date of incorporation.
How to Stop Being a Dormant Company
If a dormant company intends to resume business, it needs to submit a special resolution to the Companies Registry declaring that the company intends to enter into an accounting transaction. In addition, the dormant status is automatically terminated as soon as an accounting transaction relating to the company occurs.
Putting a company into dormant status allows a private company that is not ready to start operation, and is yet to have accounting transactions to remain in the market at the minimal cost. Alternatively, if it has not been decided whether to or close the company, the company can also apply to be dormant, reducing operating costs and allowing more time for consideration.
After the dormant company successfully conducts "zero declaration", it will be exempted from submitting the annual return and other procedures, but "zero declaration" have strict conditions, companies must examine its past activities for smooth application. If you want to know whether your business is qualified for "zero declaration", you can consult professional advice from reputable business centres. Onestart Business Centre provides a variety of accounting and audit services, appointment of secretaries, company incorporation or dissolution and other services. To know more, feel free to call 3575 6888, or Whatsapp OneStart Business Consultants OneStart Business Consultants!