Your Simplified Annual Compliance Guide in Hong Kong
Are you considering setting up a company in Hong Kong? Perhaps you have a Hong Kong Company but find it confusing to keep up with the compliance. Has your accountant suddenly reached out to you with a new charge that you are not familiar with? This article is to clarify the basic responsibilities that your Hong Kong Limited Company shall take up every year.
Annual compliance in Hong Kong
Annual compliance refers to a set of responsibilities a company should assume once it has been established. You must observe these compliance requirements according to your company’s fiscal year-end and the anniversary date. In Hong Kong, every private company must comply with the obligations administered by these two government entities:
– Companies Registry
– Inland Revenue Department
COMPLIANCE WITH THE COMPANIES REGISTRY
The Companies Registry is the department in charge of registering local and non-local companies in Hong Kong. It maintains records of active and dissolved companies.
Every year, a company should deliver an Annual Return, which contains its particulars, such as the registered office, shareholders, directors, company secretary. If the company does not file the Annual Return after 42 days of the deadline, the company will have to pay penalties. Please see the Annual Return Form “NAR1(Private)_Specimen-e” for your reference.
Business Registration must be renewed upon its expiry date. Normally, if you have applied for a one-year Business Registration, we recommend preparing the renewal of the Business Registration before the anniversary of the company. Please see Business registration specimen for your reference.
Significant Controller Register (SCR)
To enhance the transparency of corporate beneficial ownership, a company
incorporated in Hong Kong must obtain and maintain up-to-date beneficial ownership information by keeping a Significant Controllers Register. The SCR register must be kept at its registered office address or a place in Hong Kong. In the latter case, the company must file a Form NR2 to the Companies Registry reporting the location of SCR. The Register should be open for inspection by law enforcement officers upon demand. Failing to do so will render the company and the responsible person of the company liable to fines.
COMPLIANCE WITH THE INLAND REVENUE DEPARTMENT
The company should prepare financial statements for each fiscal year. The periodicity of the reports will depend on the company and the need for the availability of financial information. The reports can be prepared on a monthly, quarterly, biannual, or annual basis.
Regardless of the size, companies in Hong Kong are required to audit their financial statements and present them together with a profit tax return to the Inland
Revenue Department. The audit should be performed on an annual basis.
Profits tax return (“PTR”)
Annual profits tax returns are normally issued to taxpayers on 1 April each year. Once a Profits Tax Return is issued, the company is required to lodge the completed PTR together with the profits tax computation and the duly signed audited accounts for the basis period. Please see “ebir51” regarding the format of the Profits Tax Return.
Hong Kong Salaries Tax is charged on the assessable income earned by an employee or an office holder in a year of assessment that runs from 1 April to 31 March of the following year.
As an employer, the company has the following reporting obligations to the Inland Revenue Department (“IRD”) if it anticipates that the company hires an employee who is likely to be chargeable to Hong Kong Salaries Tax.
i. Commencement return – The company has to file Form IR56E within 3 months of employing the employee
ii. Annual return – The company has to file Form BIR56A and IR56B. The annual return BIR. 56A is normally issued in early April and the filing deadline of the form (together with completed IR56B, where applicable) is within 1 month from the date of issue.
iii. Cessation return – The Company has to file Form IR56F (Employee who is about to Cease to be Employed) or IR56G (Employee who is about to Depart from Hong Kong) one month before the date of termination of the Philippines employee’s employment. IR56G has to be filed in the situation when the employee leaves Hong Kong for good or a substantial period of time usually in excess of 1 month. From the date of filing IR56G and until such time the employee has made tax clearance and can produce to the company a “letter of release” issued by the IRD, the company should withhold all amounts due to be paid to the employee (including salaries, commission, bonus, reimbursement of rent/expense, gratuity, money or money’s worth included).
Please note that the company does not have a tax withholding obligation except in the situation mentioned in (iii) above when the employee is about to depart from Hong Kong.
1. Understand the basic accounting and taxation system and practice in Hong
2. Review in-depth the service proposal you receive from the external accounting and secretarial services provider.
3. Establish a good habit of keeping and organizing business records from day one.
4. Don’t delay the declarations and reporting. This might lead you to the loss of information and records internally and the delay in presenting information to third parties like the banks, and penalties from the authorities.
5. For companies with a large number of transactions, it is important to prepare financial reports on a more frequent basis.
6. Review your financial reports. Once you receive the financial reports from your accountants, go through the information and seek clarifications if you have doubt. A responsible service provider will be able to answer your questions swiftly.
7. Keep your company statutory and business records up to date.
8. Update your bank at least once a year on the company status. Make sure your bank account has sufficient funds for bank charge deduction.
If you have any questions regarding your company’s responsibilities or how to
prepare the information, please get in touch with us and request a free consultation.
Contact: Ms. Lily Xiang, Accounting Manager
Written by Luz Deneb Martínez, Latin Department, CW CPA
Annual compliance in China
Follow the local compliance and keep your company up to date and in good standing with the authorities. Although 2020 has been a year with changes and benefits from the government, foreign–invested companies need to follow the basics:
- Annual Audit
- Corporate Income Tax Reconciliation
- Annual Reporting
The global economic landscape has suffered a significant change last year. Nevertheless, foreign companies in China should comply and follow local regulations to avoid penalties or deduction in their social credit points. One of the most critical steps in staying compliant is performing an annual audit.
Having your company audited by a qualified CPA will reduce the chance of being inspected by tax authorities and help to identify any problem in the company’s internal control and financial system.
Compliance in China for Foreign Invested Enterprises
It is important to note that China adopts the calendar year as the fiscal year for all companies and enterprises. There are three steps in following the annual compliance for Foreign Invested Enterprises:
- Annual Audit – to be completed by 30 April
- Corporate Income Tax Reconciliation – to be completed before 31 May
- Annual report to government authorities – to be filed in June each year
The Annual Audit should be prepared by a Certified Public Accountant in China, meaning an independent firm should be in charge of this process. The report will include the auditor’s review of the full fiscal year’s financial statements from 1 January to 31 December.
Why perform an audit?
Although it is not required to file the report to the Tax Bureau in China, the company will declare if the Audit has been performed. Bear in mind that the Tax Bureau can require the company to provide supporting documents such as audit reports at any time, so audit reports should be kept indefinitely by the company.
Performing an audit in China for foreign companies will be beneficial in other ways:
- It is an important tool when presenting information to the headquarters and shareholders about the company’s operation in China.
- An audit can bring a clear image of the management and the people in charge of the local operation.
- If the company needs to present information to potential investors, an updated audit report shows clarity in the business operation.
- In case a company expects to obtain credit for the operation, the audit report shows the financial strength to obtain help from banking or insurance institutions.
Corporate Income Tax Reconciliation
Before 31 May of each year, companies need to perform the Corporate Income Tax Reconciliation with the Tax Bureau. The reason for this process is to compare the income tax paid monthly or quarterly with the figures in the audited financial statements.
Adjustments of tax payable can occur in the following situations:
- Expenses that were expected to be deductible but the fapiao cannot be obtained, which is one of the most recurrent problems.
- Payments that were expected to be received from clients in the last quarter could be brought forward to the following year.
- With COVID–19, many clients have canceled orders, which should be reflected in the annual profit and corporate income tax calculation.
Annual Reporting to Government Authorities
In the month of June, the companies established in China should file a joint annual report. The annual report will provide key information of the company’s operation, structure, and activities to the different authorities. In recent years, and due to the government’s efforts to simplify the processes, the Annual Reporting is done in one single filing at the National Enterprise Credit Information, which will share the information with other government offices.
If you need any assistance in the annual compliance for 2020, contact us at firstname.lastname@example.org.
Written by Luz Deneb Martinez, Latin Department, CW CPA