Audit Exemption and Reporting Exemption for Dormant Company in Hong Kong – According to Hong Kong Law

Audit Exemption and Reporting Exemption for Dormant Company in Hong KongAccording to Section 344A of the Hong Kong Companies Ordinance (the “Ordinance”), a private company in Hong Kong can declare as a dormant company by passing a relevant special resolution and submitting necessary documents to the Registrar. A dormant company will be exempted from complying certain requirements as stipulated in the Ordinance, which will, in turn, enables an inactive company to be retained at a minimum maintenance cost. This article will walk you through the Audit Exemption and Reporting Exemption for Dormant Company in Hong Kong requirements as stipulated in the ordinance regarding the conditions, procedures, and consequences for a company to apply for dormant status.


What Is a Dormant Company? This Company Can Apply for Audit Exemption and Reporting Exemption

As the name suggests, a dormant company refers to a Hong Kong limited company with no significant accounting transactions during a financial year. The definition of a dormant company, however, is not the same as a “non-trading company” – a term with no legal meaning.

Precisely speaking, “no significant accounting transactions” means no entries in the company’s accounting records. The amount paid for shares when the company is first established as well as the costs that the company may incur (in order to keep the company registered at Companies Registry) do not tantamount to significant accounting transactions. In other words, a dormant company cannot have any accounting transactions except specific allowable transactions as mentioned above. A non-trading company, on the other hand, refers to a company that is not doing business but it may still have other accounting transactions going through its books.

A dormant company, according to Section 344A of the Ordinance, is exempted from complying with the following requirements:

  1. Sections 107 to 111 – Filing of an annual return and holding of an annual general meeting;
  2. Sections 122 to 134, 140A to 141 and 141C to 141D – Preparation of audited financial statements and appointment (or resignation or removal) of auditors.

There is no specific “deadline” for a company to stay dormant – a dormant company can stay inactive for as long as necessary.


Reasons for Application for Dormant Status

Companies can be dormant for many different reasons – be it to safeguard a company name, or to get ready for the future project, or to hold an asset or intellectual property. Another reason to go dormant is to maintain an inactive company at the lowest possible maintenance cost.


Dormant Status Application Procedures

As mentioned above, a company needs to pass a special resolution authorising its

Director(s) to make and deliver to the Registrar of Companies a statutory declaration to

the effect that the company to become dormant.

According to Section 344A of the Ordinance, the dormant company must not enter into a relevant accounting transaction. Please note that “transaction” means transaction as required by Section 121 of the Ordinance that to be entered in the company’s books of accounts.

The definition of accounting transaction covers the following transactions:

  1. all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place;
  2. all sales and purchases of goods (by the company); and
  3. the assets and liabilities of the company.

Failure to comply with any of the above will result in the cessation of the exemption conferred to a dormant company from the date the relevant accounting transaction. Any shareholder of the company who is aware or must have known about the relevant accounting transaction,

As well as all directors of the company will be personally liable for any debt arising out of the relevant accounting transaction.


Responsibilities of Officers of a Dormant Company

A dormant company’s officers have similar responsibilities as for those of a trading company. The directors and secretary will manage the company on behalf of the shareholders or members. They are responsible for holding meetings and ensuring timely submission of all the necessary returns and other documents to Companies Registry.


Continuing Obligations of a Dormant Company

The laws mandate that a dormant company must:

  1. Maintain 1 director, 1 shareholder, a company secretary and a registered office;
  2. File the report on any changes in its officers or registered office to the Registrar;
  3. Renew its business registration certificate, and
  4. Pay the annual business registration fee to the Hong Kong Government
  5. File Profits Tax Return (should there is one issued by the Inland Revenue Department)