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Common compliance mistakes for businesses operating in Hong Kong.

Common compliance mistakes for businesses operating in Hong Kong

This is a guide to common compliance mistakes for businesses operating in Hong Kong.

When you operate a company, it is important that you understand the different requirements to avoid any misunderstandings or mistakes. We have listed four mistakes companies operating in Hong Kong commonly make, which are:

  1. Confusing company registration and trademark registration
  2. Confusing the ”annual return” and the profits tax return
  3. Failing to perform annual statutory audits
  4. Misunderstanding the roles of directors and shareholders

1. Confusing company registration and trademark registration

A common confusion for companies in Hong Kong is company registration and trademark registration; different laws and government departments regulate them. The authority responsible for company registration is the Companies Registry, while trademarks are registered through the Intellectual Property Department.

Once you register your company with the Companies Registry, you still do not have the exclusive right to use the company name as a trademark. You must apply to register your trademark with the Trade Mark Registry to obtain trademark protection.

The Trade Marks Ordinance protects trademarks in Hong Kong.

How to register your trademark in Hong Kong?

Trademark registration can be made online or offline with the Trade Marks Registry, Intellectual Property Department (IPD).

To apply, you will need the following:

  • Trademark registration application form (Form T2)
  • Personal details of the applicant
  • Specifications of the goods or services in respect of which it is sought to trademark registration
  • Other requested documents

Once you have submitted your application, it will be checked to ensure it meets the IPD’s requirements. If there are no objections to your application, it will be published in the Hong Kong Intellectual Property Journal for public inspection, which can be opposed by a third party within three months.

If there are no objections, the Registrar of Trade Marks will issue a registration certificate for your trademark.

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2. Annual return vs profits tax return

Another mistake companies make is confusing Hong Kong’s “annual return” with the profits tax return. In fact, the annual return is submitted to the Companies Registry and does not concern the taxes of the company, while the profits tax return is used for filing the company’s taxes with the Inland Revenue Department (IRD).

Annual return

An annual return (Form NAR1) is a form that companies must file with the Companies Registry every year, which covers important information about your company.

The submission deadline for the annual return is within 42 days after the company’s incorporation anniversary.

The annual return consists of the following particulars:

  • Company name
  • Registered office address
  • Type of company
  • Period covered by financial statements delivered
  • Share capital (if any)
  • Details of the directors
  • Details of the company secretary
  • Particulars of member(s) of a company having a share capital
  • Company records

Even if the company information has not changed, you are still required to submit Form NAR1 and pay a fee. A fine will be imposed if the annual return is filed late.

The fines are as follows:

Date of deliveryFine (HKD)
More than 42 days but less than three months since the company’ incorporation870
More than tree months but less than six months since the company’s incorporation1,740
More than six months but less than nine months since the company’s incorporation2,610
More than nine months since the company’s incorporation3,480

The annual return can be submitted through hard copy by downloading the Form NAR1 and delivering it by post or in-person to the Companies Registry. It can also be submitted by electronic form through the Companies Registry e-filing service.

Profits tax return

The profit tax return, on the other hand, is for reporting all the profit earned by companies, partnerships, or non-residents within Hong Kong.

The issuance of profits tax returns is not fixed, and the deadline for filing the return depends on the financial year-end of the company.

For newly established businesses, the IRD will issue the profits tax return 18 months after commencing business.

The profits tax return can be filed on Hong Kong’s e-tax website.

There are three types of profits tax returns, which are:

  • Profits tax return – Corporations (BIR51)
  • Profits tax return – Persons other than corporations (BIR52)
  • Profits tax return – In respect of non-resident persons (BIR54)

Corporations need to submit the BIR51 form together with audited financial statements, while small corporations and dormant companies are required to submit form BIR51 with other supplementary forms.

It’s essential to understand that both the annual return and the profits tax return are mandatory every year, with penalties for failing to submit the required documentation.

3. Failing to perform annual statutory audits

According to the new Hong Kong Companies Ordinance, all incorporated companies are required to conduct a statutory audit, and limited companies must appoint Certified Public Accountants (CPA) to audit the company’s records.

The auditors will also comment on the statements about whether the information is accurate and complies with the Hong Kong Financial Reporting Standards or the SME-FRE for Small- and Medium-sized Enterprises.

Statements that need to be audited are:

  • Bank statements
  • Contracts
  • Expenditure receipts
  • Financial statements
  • Management accounts
  • Relevant accounting documents
  • Balance sheet
  • Ledger of business transactions
  • Income statement

Find out more about the audit requirements in our Introduction to Accounting guide.

4. Misunderstanding the director and shareholder roles

This point of confusion is nearly universal and not unique to Hong Kong, however, it is relatively common and strictly enforced by Hong Kong regulators.

Shareholders are the owners of a company, control the management, and receive the profits. They hire directors to run the daily operations of the company.

The shareholders’ roles and responsibilities are:

  • Appoint and remove company officers
  • Attend, participate, and vote in company meetings
  • Decide on the director’s salary
  • Make decisions directors cannot make
  • Monitor and approve the company’s financial statements
  • Monitor the company’s performance

The roles and responsibilities of a company director are:

  • Administer, control, and direct the company
  • Ensure the company is legally compliant
  • Manage the company in the interest of the shareholders
  • Represent the company’s interests
  • Execute resolutions passed at shareholder meetings

Both positions obviously have very important but distinct roles in operating a company, and the individuals appointed to carry out these roles must have a good understanding of their responsibilities to avoid making any mistakes. Even so, many people confuse the two or think they are the same thing, which can lead to compliance omissions or violations.

Conclusion

Listed above are some of the compliance mistakes businesses in Hong Kong commonly make. These mistakes must be avoided as they may affect the operations of the company or result in penalties. If you need advice about compliance in Hong Kong, do not hesitate to contact Acclime.