I am frequently asked, primarily by overseas companies, under what circumstances a company, whether registered in Hong Kong or in an overseas jurisdiction, is required to file a Hong Kong profits tax return and to have its annual accounts audited.
Under Section 51 Inland Revenue Ordinance, an assessor may issue a profits tax return to any person requiring that it be completed and filed within a stated period of time. The tax return is not considered complete unless it is accompanied by the relevant audited accounts of the company, the tax computation for the period in question, supplementary form IR51S and other documents requested by the Inland Revenue Department (“The Department”).
Section 14 Inland Revenue Ordinance (‘IRO’) only charges to profits tax those persons carrying on business in Hong Kong in respect of assessable profits, not of a capital nature, that arise in or are derived from Hong Kong in the basis period for the year of assessment covered by the tax return.
If the person is not carrying on business in Hong Kong, there is no obligation to complete the return but as a matter of practice the return should be returned to the Department with a comprehensive explanation as to why the person considers he is not carrying on business in Hong Kong. If a person is carrying on business in Hong Kong but has no profits chargeable to tax, that person must file a complete profits tax return with all the relevant attachments which should also include a detailed explanation as to why each source of income is not considered to be taxable.
Section 51(2) IRO also places a responsibility on a person to inform the Department, within 4 months after the end of the basis period for a year of assessment in which he receives assessable profits, that he has received profits that fall within the Section 14 IRO charge unless he has already received a profits tax return.
However, by concession, if a company is classified as a small company i.e. its total gross income does not exceed HK$500,000 for the relevant basis period, the company only needs to file the profits tax return and form 51S for that year of assessment. However, the Department emphasises the need to retain all the supporting documentation in case it should be required at a later date.
With the exception of private companies, who under given circumstances may only file a balance sheet and a directors report on the state of affairs of the company, all companies registered in Hong Kong must prepare a complete set of financial statements which are required to be audited by a qualified Hong Kong person. The form of the accounts is governed by the Companies Ordinance and the Hong Kong Institute of Certified Public Accountants.
Companies not registered in Hong Kong are required to comply with the regulations of their own jurisdiction and not necessarily with those applicable to companies registered in Hong Kong. Hence it follows that overseas companies carrying on business in Hong Kong must file a profits tax return for its Hong Kong branch but the return need not include audited statements of the branch.
It can be seen from the above that even for private companies registered in Hong Kong with a single shareholder/director there is a general requirement to produce audited accounts. As there is no requirement to file such accounts with the annual return submitted to the Companies Registrar the only regulatory need for audited accounts is with respect to the filing of a profit tax return.
Personally, I question the need for this in all cases and would suggest that consideration be given to extending the circumstances in which audits of private company accounts are not required.
