Estimate time to read: 6 min
July 23, 2021
How to Choose the Best Corporate Secretary in Hong Kong
Without actually closing it, do you want to keep your business on hold for a specific reason? Or do you want to take some time before drumming up your new company with the lowest possible cost to get things settled? Then all you should know about is Hong Kong’s Dormant Company.
If you operate one or more businesses, for some reason, you may want to put the company on hold, or you may even want some rest after some hectic trading. Either way, keeping a dormant business will make it easier for you to do so. This article will help you get to the root of what Hong Kong’s dormant business is all about.
What is a dormant company?
If there are no accounting transactions within a year, a corporation is known as an Inactive company, which is legally allowed for a temporary duration to stop doing its business operation, but the company remains registered.
Many firms apply for inactive status or dormant status to save time and resources while filing annual reports, conducting annual general meetings, hiring auditors, and preparing audited financial statements.
One needs to thoroughly understand what “no accounting transactions” means to comprehend the idea of a dormant business under Hong Kong jurisdiction. The financial report of the organization documents an accounting transaction.
The Companies Ordinance allows a corporation to declare itself as inactive and, for a minimum maintenance expense, proceed with the same status as long as it has no accounting transactions. The amount charged by the company for the shares at the time of its first incorporation is exempted as a significant accounting transaction. On the other hand, its “inactive” status became legally registered by a legitimately dormant company in Hong Kong. Accordingly, it does not enter into accounting transactions other than those authorized by the Ordinance. Similarly, in Hong Kong, a dormant corporation is excluded from certain obligations and may benefit from certain benefits to suit
What sets a dormant company in Hong Kong apart?
You need to better comprehend what “no significant accounting transactions” actually means to fully understand the idea of a dormant company under Hong Kong control, to recognize one, and not to confuse it with a non-trading company. Believe it or not, a non-trading corporation with a dormant company is sometimes used interchangeably.
Any entry that the corporation is forced to make into its accounting records is a significant accounting transaction. For further detail, it is advisable to consult the Ordinance’s definition.
Appropriate accounting transactions, as defined in the section, consist of:
- The company’s assets and liabilities.
- All sums of revenue generated and extended by the business and matters on which the receipt and expenditure occur.
- All sales and the company’s acquisitions of products.
However, the sums charged by the corporation for the shares when the company was first formed or the expenses incurred to maintain the company licensed (including unpaid fees to be paid to the registrar, to comply with legal requirements, or to ensure its management and records) are excluded as substantial transactions.
A non-trading firm is not involved in any commercial practice and has no legal consequences, which, in turn, does not relieve itself of the responsibility to report other transactions that are already in its book.
On the other hand, by its ‘inactive’ status, a genuine dormant corporation has legally registered and hence does not enter into any substantial accounting transactions other than those referred to above that are authorized by the Ordinance. Similarly, in Hong Kong, a dormant corporation is excluded from certain obligations and may benefit from certain benefits to add.
Benefits of a Dormant Company in Hong Kong
The key advantage of dormant status is that it helps to maintain your inactive business at a minimal cost of upkeep. Once the company becomes dormant company in Hong Kong, any annual obligations would not need to be met. However, in the year in which the company declares itself dormant, a simple renewal of that year must also be requested by the company.
The following are some of the advantages of having a dormant firm in Hong Kong:
To hold certain assets
As part of a balanced portfolio, most investors may save a portion of assets and many cautious investors will keep the remainder of these assets in their collection to ensure capital protection. In Hong Kong, calling itself a dormant corporation enables a company to have a way to protect its certain properties or intellectual property.
To protect the image of the organization
There are several persuasive explanations for establishing a dormant business or registering a standard business as such. When a company registers in Hong Kong to be a dormant company, its inactive status helps to denote your brand and to secure the identity of your company.
To maintain the corporation as a legitimate body
It can be difficult to operate a firm at a low maintenance rate. Yet dormancy lets you quickly provide it. Your corporation is excluded from compliance with several legal provisions by being inactive. A few of them, as set out in the Ordinance, are below:
- Formulation of audited financial records and the appointment of auditors or their dismissal or withdrawal.
- To file an annual return.
- Holding general annual meetings.
To consciously suspend the company’s activities
If you do not have tasks to start immediately, then dormancy will help you save on the company’s different operations. Once you have no legal formalities to fulfill, it will be of tremendous benefit
To serve all other primary needs
You may want to stop the company under some conditions. Yet you can re-launch your company later at your leisure and without having to dissolve it by officially announcing your business as inactive. It saves you from the challenge of beginning a new business all over again.
How in Hong Kong does a corporation apply for dormancy?
Entrepreneurs are prepared to open a company in Hong Kong because of the pro-business atmosphere and the low taxation regime. Though, for a particular cause, corporations ought to quit in certain instances. That is where the dormancy must be applied for by the company.
A corporation needs to pass a particular resolution authorizing its director(s) to make and deliver it to the company registrar. It is a legal document to the effect that the entity will become dormant. Directors can file a special resolution with the Companies Registry within 15 days after the resolution is passed.
From the date of its incorporation or any date specified, the sole qualifying requirement for being a dormant company in Hong Kong is “no relevant accounting transaction”.
Dormant corporations are unable to enter into the selling or purchase of goods or monetary transactions. Only under a mandatory regime will the company pay money. The managers of the company will continue to participate in their particular work to ensure that the company meets the standards that are needed to be met during the dormant period.
In Hong Kong, not every business can become a dormant company. There are some categories of firms that are not eligible to claim dormancy. A corporation that is not a private company is not protected by the Ordinance. There are some categories of businesses below that are not permitted to declare dormancy:
- A corporation that has a subsidiary that comes into any of the eight sections listed above.
- As specified in the Banking Ordinance, an authorized entity
- A trader licensed under the Trade Ordinance on Commodities
Regulations and Requirements for Dormant Corporations
Regulations are necessary for any form of operation to ensure the protection and integrity of the workplace. There are specific provisions for the Dormant companies, as well as the dormant company’s officer’s responsibilities, examination and disclosure exemptions, financial transactions, and the dormant company’s annual compliance obligation.
Audit Exemption and Reporting Exemption
During the time of dormancy, a dormant company in Hong Kong must not have any accounting or financial activities, except transactions from the payment of fees allowed by the Companies Ordinance.
HK authorized businesses to have to do their accounts every year to get their accounts audited by a professional CPA. The Companies Ordinance permits a corporation to declare itself as inactive and, with a minimum operating fee, proceed with the same status as long as it has no accounting transactions.
Cessation of Dormant Status
If a dormant business is no longer necessary, it is important to officially re-activate it. If you intend to recommence the operation of the firm, or there is an accounting activity happening in the company, the company should avoid being inactive.
It would run like a regular business until ceasing to be inactive. By going through the same process as when you applied for it, you may renounce the inactive status and re-activate the business operations.
The corporation ceases to be an inactive entity if a dormant company enters into an accounting transaction. On and after the date of the accounting operation, the exemption from the delivery of annual returns ceases to affect.
All the organization needs to end the inactive status is to pass another formal agreement announcing that the company plans to enter into an accounting transaction and that the managers should apply the special resolution for registration to the Companies Registry. The business will resume its active status after this.
Investors who eventually want not to pursue the business will elect to de-register it. This ensures that the legal firm is automatically closed and excluded from the registry, which may be accomplished by the voluntary procedure (de-registration) in the absence of debt or by voluntary liquidation of the company.
Responsibilities of Officers
After the corporation has become a dormant company, it works at a minimal cost level. The submission of annual accounts, the conducting of annual general meetings, the hiring of auditors, and the preparation of audited financial statements shall be exempted.
The officers of the inactive company in Hong Kong do have clear responsibilities, while the company is on hold, they need to comply with their commitments and fulfill their duties under the Companies’ Ordinance. They have comparable roles to those in a typical organization.
Significant transactions in accounting
Various kinds of transactions arise in a business dependent on the exchanging of funds. A dormant business in Hong Kong follows the notion that no accounting transaction is important. But there are certain obligatory purchases to be done by officers of the company.
Section 2 of the Companies Ordinance specifies that an accounting transaction means a contract involving the accounting records of the corporation to be recorded in compliance with section 373. Receipt and spending of capital, properties, and liabilities, for example. According to regulations, any exchange required by the Ordinance to pay the corporation is exempt. Collection of the company registration fee, for instance, should not be viewed as an accounting transaction.
Now that you have collected nearly all the details and have a complete understanding of the meaning of a dormant business in Hong Kong, you would need a helping hand to go through the actual process of being a dormant business. Vita Liberta will provide you with proper advice in that instance.
Vita Liberta places you in the first place. For this objective, our key concern is on start-ups with global targets. Our team offers full business forming services in Hong Kong, but we can also provide the requisite assistance for the liquidation and de-registration of the company. At each stage in establishing a dormant business in Hong Kong, we will send you the information and advice for better knowledge.