Hong Kong Audit Guide: In-depth answers to nine frequently asked questions

All companies registered in Hong Kong, regardless of their business situation, are subject to the statutory obligations of annual financial audit and tax filing. An audit is conducted by a certified accountant to verify the financial records of a local company for one year or more and requires the accountant to sign an audit report.

Many businesses in Hong Kong may not be clear about the specific requirements of the audit. To help, the following is a breakdown of nine questions about Hong Kong companies' audit requirements, tax filing obligations, audit timing, and whether zero filing is possible.

1. Accounting audit requirements

All registered companies are required to complete annual accounting audits and tax returns in accordance with regulatory requirements, regardless of whether the company has actual business activities. In order to be compliant, the company must appoint a certified public accountant in Hong Kong to conduct the audit, complete the accounting and tax filing process, and must have the accountant's signature to confirm the accuracy and compliance of the report.

After setting up a Hong Kong company, you need to pay attention to two things: one is to understand and comply with tax laws and regulations, and the other is to pay attention to the financial situation and regularly audit the tax returns.

Second, do you have to do accounts and tax returns?

In Hong Kong, all registered companies are required to complete annual audits and tax filings, a requirement that applies to all companies, regardless of whether they are active or have income. The new company will receive its first tax return in the 18th month after incorporation and must file a tax report audited by a licensed accountant within the prescribed period.

*Failure to comply with these regulations may result in fines and even deregistration of the company in the event of serious violations.

Third, the time point of the account audit

▶ Newly established Hong Kong company

You have the freedom to choose your time to do the audit within 18 months of opening. However, once the Profits Tax Return is received from the Inland Revenue Department, the company is required to complete the tax filing process within the next 3 months.

▶ Audits of existing companies

For Hong Kong companies that have already filed their first tax return, the fixed tax year will be filed every 12 months from the date of the first filing. Companies are required to file their tax returns within one month of receiving their profits tax returns each year.

▶ The choice of the year-end date

Normally, companies set the year-end date on the last day of the 12-18 month cycle after incorporation.

For example, if Company A is incorporated on 1 April 2023, its first year-end date can be 31 March 2024 (12 months) or 30 September 2024 (18 months).

Fourth, if you do not operate in Hong Kong, can you declare zero?

The Hong Kong government has made it clear that from 1 April 2023, tax statements with zero filing will no longer be accepted. The new rule requires a complete tax return and an accountant-audited report to file a tax return, even if the company has no business activities or no revenue.

Therefore, all companies registered in Hong Kong, regardless of the size of their business, are required to complete their tax filings in accordance with the latest policy and include a tax audit report signed by a certified accountant in Hong Kong.

5. The potential risk of not completing the accounting audit

Hong Kong's laws require all locally incorporated companies to make regular bookkeeping and tax returns every year, even if they are not profitable. As the Hong Kong Inland Revenue Department (IRD) has stepped up its scrutiny of audits and tax filings, the measures taken against companies that fail to file their returns have become increasingly stringent. Companies that fail to complete their tax returns on time are responsible for the following consequences:

1. Tax penalty (failure to submit the tax return within the specified time after receiving the tax return)

▶ A fine of HK$1,200 will be imposed for late filing of tax returns for the first time. If it is not processed within 14 days, the fine will increase to HK$3,000.

▶ A fine of HK$3,000 will be imposed for late filing of the second tax return. If it is not resolved within 14 days, the fine can rise to HK$8,000.

2. Bank accounts are restricted

Banks in Hong Kong conduct annual commercial due diligence on corporate accounts. Failure to file truthfully or late filing of accounts and tax returns may result in the account being frozen or closed, which can seriously interfere with the company's operations.

3. Difficulties in handling business

For example, when updating a company's board of directors or shareholding structure, the bank may ask for an updated tax report.

4. Damage to reputation

Companies that fail to file tax returns will have a damaged reputation in Hong Kong, which may affect business relationships and overall brand image.

6. Summary of tax filing and tax payment

1. Filing a tax return is not the same as paying taxes

When a Hong Kong company receives a tax notice for tax filing, it does not mean that it needs to pay a large amount of tax. In fact, the process of conducting an audit is separate and does not directly lead to the payment of taxes in itself.

2. Basis for taxation

Hong Kong's tax system adopts the territorial source principle, which means that a company is only taxable on its profits generated in Hong Kong. If profits are generated outside Hong Kong, the company is eligible to apply for tax exemption.

3. Net profit assessment

Companies are required to provide sufficient and reasonable documentation of their profits in Hong Kong. The tax assessment is based on the company's net profit, which is the profit retained after taxes.

4. Unequal tax rate

Hong Kong's corporate tax rate is linked to the level of profitability:

(1) The corporate tax rate for profits exceeding HK$2 million is 16.5%.

(2) For companies with profits of HK$2 million or less, the tax rate is 8.25%.

7. List of documents required to file a tax return

When filing a tax declaration for a Hong Kong company, a series of key documents need to be prepared, and the specific requirements are as follows:

▶ Information required for the first tax return

1. Incorporation documents: including Certificate of Incorporation, latest Annual Return and Business Registration Certificate.

2. Bank documents: Bank statements of all accounts, such as savings accounts, credit accounts, credit card accounts, etc.

3. Transaction vouchers: include sales and purchase-related bills, such as proforma invoices, contracts or orders.

4. Expense documents: such as lease contracts, transportation documents, employee salary schedules, office expenses, travel expenses, business entertainment expenses and other expenditure vouchers.

▶ Additional information that is not required for the first tax return

In addition to the above information, you need to add the following two:

1. Tax return for the previous financial year

2. A copy of the tax statement for the previous year.

*As tax regulations are subject to change, it is important to check the latest tax requirements before collating these tax filings. It is advisable to visit the official website of the Hong Kong Inland Revenue Department or consult Jude to ensure that the documents submitted comply with the current regulations and requirements.

8. Obtain a good audit report

1. Keep and prepare the original documents

An important first step in ensuring a smooth audit process is to keep all original transaction documents, including invoices, contracts, and expense bills. At the same time, make sure you have monthly statements of all bank accounts available for the duration of your business.

2. Provide bank statements in a timely manner

Avoid delays in handing out bank statements, which may incur additional charges if you need to reprint them.

3. Actively cooperate with the audit process

Respond to and cooperate with the auditor's requirements in a timely manner during the audit process, especially in the signing of key documents such as bank confirmations and related party enquiries.

4. Understand the importance of bank confirmations

The bank confirmation letter is an important tool to verify the financial authenticity of the enterprise, which is a confirmation document issued to the bank in the name of the audited enterprise, which is used to verify the authenticity, legitimacy and integrity of the enterprise's bank deposits, loans, investors (shareholders) capital contributions, guarantees, commitments, letters of credit, letters of guarantee and other matters.

9. Application for offshore tax exemption

The overseas income of a Hong Kong company may be eligible for profits tax exemption. After successful application, these income are not subject to profits tax in Hong Kong.

▶ Advantages and disadvantages of offshore filing

1. Advantages: Successful application can avoid paying profits tax in Hong Kong.

2. Cons:

(1) The result of the application is not guaranteed, and it may fail and you may need to pay taxes.

(2) The application process is expensive and takes a long time.

(3) Even if the application is successful, you may need to pay taxes in other regions.

The above is an overview of the key information about auditing in Hong Kong. Given the complexity and importance of the audit process, inexperienced companies may make mistakes in data preparation or report submission, causing unnecessary headaches.