An inactive company in Hong Kong which does not have any accounting transaction is required to officially declare itself as dormant as it will not be automatically considered dormant.
To declare as a dormant company in Hong Kong, this includes filing a dormant company tax return, maintaining its records, and complying with changes in corporate law. To apply for dormancy, the company needs to pass a special resolution with at least 75% of the shareholders’ votes. Then the company directors must file the special resolution with the Companies Registry within 15 days of passing the special resolution.
“Dormant” is a legal term that applies to Hong Kong company. The company must have “no significant accounting transactions” during the financial year. The costs incurred for the company to keep its annual registration/incorporation do NOT count as signification accounting transactions, for example the registry office address, secretary services, business registration fee etc…
The directors/shareholders/owners are still responsible for handling and pay for the annual return, tax return (if any), and business registration renewal on time, and they must report any changes in its registration to the Companies Registry department.
The benefits of declaring a company dormant include reduced costs and formalities, preservation of the legal entity for future use, better assets protection. The inactive status also save the time and cost for filing an annual return, appointing auditors, preparing audited financial statements. (Audit Exemption and Reporting Exemption for Dormant Company in Hong Kong)
Annual compliance requirements for a dormant company
a dormant status remains a legal entity and is required to follow certain legal regulations.
A dormant company must:
Having a registered office and at least 1 director, 1 shareholder, and a company secretary Reporting any changes in the company’s officers or registered office with the Companies Registry Renewing business registration certificate Filing Profit Tax Returns if required by the Inland Revenue Department Pay for the above relevant service fees and government fees
Stop being dormant? Re-activate the company.
If you no longer want the dormancy status, you will need to re-activate the company.
You will have to pass a special resolution with the majority of the shareholders’ votes and notify the Companies Registry about the cessation of the dormant status and declare that the company intends to enter into an accounting transaction.
The company will be deemed to have ceased to be dormant by making an accounting transaction even without notifying the Registrar.
Registration: Register with the Companies Registry and Inland Revenue Department (IRD).
Requirements:
At least 1 director (resident or non-resident).
Minimum HKD 1 share capital.
Local company secretary and Hong Kong office address.
Submit Articles of Association, incorporation forms, and obtain a Business Registration Certificate.
Tip: Engage a professional service for streamlined compliance, especially for offshore tax exemption guidance.
Prove Offshore-Sourced Income
Key Criteria:
No Hong Kong-based operations: Avoid sales, contracts, employees, offices, or suppliers in Hong Kong.
Focus on transaction location: Profits must stem from activities conducted entirely outside Hong Kong.
Evidence Required:
Contracts/Agreements: Signed and executed outside Hong Kong.
Financial Records: Offshore invoices, bank statements (foreign currency), and shipping documents.
Operational Proof: Hosted overseas websites, third-party logistics outside Hong Kong, and foreign client/supplier communications.
Example: A Hong Kong-registered e-commerce company selling to Europe, sourcing goods from China, and processing payments in EUR via an overseas bank qualifies for exemption.
Maintain Robust Documentation
Records to Keep:
Basic Documents: Certificate of Incorporation, Articles of Association, organizational charts.
Business Records: Contracts, email correspondence, outsourcing agreements, and economic substance proof (e.g., overseas office leases).
Financial Proof: Audited accounts, transaction trails, and tax filings.
Compliance:
Submit an Offshore Tax Claim (OTC) with the first Profit Tax Return (due 18 months post-incorporation).
Annual audits are mandatory to maintain exemption status (valid for 3–5 years).
Key Concepts & Requirements
Territorial Tax System:
Hong Kong taxes only locally sourced profits at 16.5%. Offshore income is exempt if proven foreign-sourced.
Source Determination: Based on the “operations test”—where profit-generating activities occur, not company registration.
Offshore Tax Claim (OTC):
Submit during the first Profit Tax Return filing.
IRD review takes 6+ months; proactive communication is critical.
Approval grants tax exemption for 3–5 years, renewable upon re-examination.
Economic Substance Requirements (FSIE Scheme):
Applies to foreign passive income (e.g., dividends, IP royalties, equity gains) for multinational enterprises (MNEs).
Non-pure equity entities: Must demonstrate substantial operations in Hong Kong (e.g., qualified employees, local expenditure).
Pure equity-holding entities: Simplified requirements but must manage investments locally.
Note: FSIE rules expanded in 2024 to include property disposal gains.
Common Pitfalls & Solutions
Rejection Reasons:
Local activities: Hiring staff, signing contracts, or storing goods in Hong Kong.
Misunderstanding “offshore company” status: Incorporation alone does not guarantee exemption.
Solutions:
Eliminate Hong Kong ties: Centralize operations overseas.
Strengthen documentation: Use third-party audits, detailed invoices, and correspondence logs.
Consult experts: Tax advisors or incorporation services can navigate complex IRD requirements.
FAQs & Additional Insights
Q: Who is eligible for offshore tax exemption? A: Hong Kong-registered companies with zero profit-generating activities in Hong Kong. Unincorporated entities (e.g., sole proprietorships) are ineligible.
Q: What income qualifies as offshore? A: Profits from sales, services, or IP licensing executed outside Hong Kong (e.g., contracts signed abroad, goods shipped directly from China to Europe).
Q: When to file an Offshore Tax Claim? A: With the first Profit Tax Return (within 18 months of incorporation). Late submissions delay exemption approval.
Q: Are there other tax incentives? A: Yes, including:
R&D tax deductions for innovation-driven businesses.
Property tax concessions for eligible rental income.
Industry-specific relief for sectors like finance and shipping.
Q: What if my application is rejected? A: Review IRD feedback, address gaps (e.g., provide additional contracts), and resubmit. Professional guidance improves success rates.
Final Tips
Stay updated: Monitor changes to the FSIE regime (e.g., 2024 amendments).
Leverage technology: Use digital accounting tools to streamline record-keeping.
Plan long-term: Ensure business operations align with offshore criteria to avoid future disputes.
Key Resources:
IRD’s Territorial Source Principle of Taxation.
IRD’s Profits Tax Exemption Guidelines.
IRD’s Foreign-Sourced Income Exemption (FSIE) Scheme.
To promote the export of goods, in China there is no VAT applicable to exported goods. When a company sources/buys products from the supplier, the supplier VAT invoice (Fapiao) includes VAT (input VAT). Normally, the input VAT could be deducted from the output VAT, but for exported goods there is no output VAT. Therefore, the government has set up a system for the refund of export-related VAT. Companies can claim back the input VAT paid for export goods through the monthly export VAT refund claim.
Who is eligible for export VAT refund?
Generally, to be eligible for export VAT refund, the export enterprise must:
Be a general VAT taxpayer;
Have a legitimate business address;
Be duly registered for tax purposes;
Hold import and export rights;
Have a business scope that includes import and export activities;
Carries out normal foreign exchange transaction and settlement activities;
Fulfills its social insurance obligations towards its employees;
Hold special permits if exporting certain products, such as vehicles, lubricants, and paraffin wax;
Have completed the necessary record-filing procedures for export tax rebate.
Which industries are eligible for VAT rebates?
As stipulated in the STA Announcement (2022), the VAT rebate policy has been extended to include all eligible companies in the following six industries:
Manufacturing and trading
Scientific R&D and technology services
Electricity, heating, gas, and water production and supply
Software and information technology services
Ecological protection and environmental governance
Transport, logistics, warehousing, and postal
The tax rebate procedure
In order to enjoy tax rebate policies, exporters should provide Chinese authorities with several documents:
Value-added tax (VAT) is one of the major indirect taxes in China.
VAT rate: The standard VAT rate in China is 13%, but there are also reduced rates of 9%, 6%, and 3%.
Invoicing (VAT Fapiao): All businesses must issue VAT invoices for the sale of taxable goods and services in China. There are two types of invoices: general VAT invoices and special VAT invoices.
General VAT taxpayers refer to enterprises whose accumulated taxable income during a consecutive period of no more than 12 months, or four quarters, exceeds RMB 5 million or those who have a sound accounting system. Multiple VAT rates of 13%, 9%, and 6% apply to general VAT taxpayers. The input VAT can be credited against the output VAT.
Small-scale VAT taxpayers refer to enterprises whose accumulated taxable income during a consecutive period of no more than 12 months, or four quarters, are below RMB 5 million or without a sound accounting system. A 3% levying rate is applied to small-scale VAT taxpayers, but they cannot deduct input VAT from output VAT.
general VAT taxpayer
small-scale VAT taxpayer
Taxable income
> RMB 5 million
≤ RMB 5 million
Rate
6% to 13%
3%
VAT payable
OUTPUT VAT IN THE CURRENT PERIOD – INPUT VAT IN THE CURRENT PERIOD
SALES x VAT RATE
Pros + + +
Tax-saving when low profit (low-markup) products; collect and verify special VAT from supplier for VAT deduction, apply VAT tax rebate for export busienss.
Tax-saving for high-profit (high markup) products; Can file VAT tax quarterly; Doesn’t need to collect and verify special VAT invoices for deduction, and the tax calculation method is straightforward; and Can enjoy certain VAT exemption benefits for small transactions.
Cons – – –
as to file tax monthly; Has to collect special VAT invoices and verify them to ensure the input VAT deduction; and increasing tax burden when profit markup on cost higher than critical ratio*, or when the enterprise is unable to collect special VAT invoices for input VAT deduction.
Has to keep in lower annual income (below RMB 5 million), can no enjoy export VAT tax rebate. Most general VAT taxpayers are dedicated to dealing with general VAT taxpayers. Small-scale VAT taxpayer cannot deduct input VAT from output VAT.
*The critical ratio here refers to a ratio of profit markup on cost under which the tax burden for the general taxpayer and small-scale taxpayer is the same. It varies based on the actual tax rates applied.
Chinese VAT rates:
Tax items
VAT rate
Most goods and some services
Sales and imports of most goods (unless otherwise specified), Labour services, including processing, repair, or assembling services, Tangible moveable property leasing services
13%
Real estate, transportation, postal and agriculture
Agricultural, forestry, animal husbandry products: grains, vegetable oils, fresh milk, medicinal and other plants, agricultural machinery, fertilizer, and pesticide, Tap water, heating, cooling, gas, coal/charcoal products for residential use, Books, newspapers, magazines, audio-visual products, electronic publications, Transportation services, Postal services, Basic telecommunications services, Real estate, construction, transfer of ownership of properties and land use rights, real estate leasing service, Other goods specified by the state council
9%
Services
Financial and insurance services, Modern services: research and development, technical services, information technology services, cultural and creative services, logistics and ancillary services, leasing, consulting, radio, film and television services, etc. Lifestyle services: education, healthcare, travel, entertainment, catering, accommodation, cultural and sports services, other daily lifestyle services, Value-added telecommunications services, Intangible assets, excluding land-use rights, Sales of virtual props for online games
6%
Small-scale taxpayers
For most goods and services.
3% (except certain actual transactions applicable to 5% VAT rate)
Exports
Export of goods and services (except where otherwise stipulated by the State Council)
0%
General VAT taxpayer calculation method:
For general taxpayers, the calculation formula is as follows:
Tax payable = current output VAT – current input VAT – previous surplus input VAT
The input VAT can be deducted from the output VAT to arrive at the tax payable. However, not all input VAT can be deducted. In order to deduct any input VAT, the company must receive a special VAT Fapiao where the tax amount is specified, and this amount must be verified in the online system of the tax bureau.
If the current output VAT is higher than the current input VAT, this will result in a VAT tax payable for the company. If the current input VAT is higher than the output VAT, the surplus amount of input VAT can be carried forward to the next period.
Small-scale VAT taxpayer calculation method:
The calculation method for small-scale taxpayer is a simplified calculation, because no able to deduct input VAT.
At Colvass Consulting, we take a detailed approach to accounting and bookkeeping services, acting as our client’s reliable partner to ensure the accuracy of their financial records and compliance with local regulations.
Outsourcing your accounting, bookkeeping, and payroll procedures to Colvass Consulting, you receive the collective experience of financial professionals with experience across a vast range of industries and business sizes to help you grow your business.
What Is a Two-Tiered Tax Rate? The Two-Tiered Tax Rates Regime involves two profit tax rates. Under the new system, the first HK$2 million of a company’s profits are taxed at a lower profits tax rate of 8.25%, while profits above HK$2 million are taxed at the standard profits tax rate of 16.5%.
The profits tax rate for the first HK$2 million (US$250,000) of profits of corporations will be lowered to 8.25%. Profits above that amount will continue to be subject to the tax rate of 16.5%.
The hong Kong Two-Tiered Profit Tax has been implemented to support small and medium-sized enterprises. This will reduce the tax burden on enterprises, especially SMEs and startup enterprises, and will help foster a favorable business environment, drive economic growth, create job opportunities and enhance Hong Kong’s competitiveness.
However, if an entity has one or more connected entities, the two-tiered profits tax rates can only apply to one nominated entity among its connected entities. The others will not qualify for the two-tiered profits tax rates.
Interest, gains or profits derived from qualifying debt instruments that are already subject to tax at half-rates under the existing provision will be excluded from the proposed two-tiered profits tax rates regime.
We are one of the leaders in management accounting services, managing vital financial data and providing perfect solutions for the clients for the development of your respective business.
Forecasting and planning, performing variance analysis, reviewing and monitoring costs is done by our registered chartered accountants who will act as your finance director.
We have expertise in providing the following services:
Prepare management reports on regular basis to keep up continuous records of your cash flow.
We act as a mediator to set all your contractual obligations coming in management accounts.
Our proper guidance makes you to stick to your core competency so that people can’t compete with you.
We take care of all the reports and makes sure that all the reports are in sequence, data has to make sense and to have proper documentation to back it up.
Our strategic approach makes us different from others.
Reports can be generated depending on your business type and as per your requirements. We can manage your accounting reports monthly, quarterly, half yearly or any other period.
Avail the following reports from us:
Cash Reports Status Reports Profit and Loss Reports Projected accounting for 5 years and much more.
Following services are provided
Generate regular management reports to monitor your cash flow, observe trends and seek additional capital (if required) based on accurate forecasts
Assistance on meeting your contractual obilgations of providing management accounts on a regular basis.
We guide you to ensure that your business is on the right track and in line with your anticipated / projected sales /income / expenditure / profits.
Our reports can help you make management decisions to get your company back on track and / or stay on track to profitability.
Reports are generated on monthly, quarterly, half yearly or any other period that is required by you.
We prepare all management accounts as per your requirement and deliver it as per agreed time lines.
