All companies in Hong Kong are either active or dormant companies. There are several reasons why any company owner in Hong Kong might choose to make the company dormant. However, even dormant companies have specific laws and regulations which must be followed accordingly.
All companies can be divided into two general categories: dormant and active companies. In Hong Kong, all companies are governed by the Companies Ordinance; this fact is true of both dormant and active companies alike.
The Companies Ordinance is the law which serves as the primary piece of corporate legislation in Hong Kong. It states that all companies, including companies limited by guarantees, share- limited public and private companies, and public and private unlimited companies must submit accounting records accordingly.
The accounting records of a company reveal all accounting transactions that have taken place every day for a year, including all money spent and received by the company. This information is used to give those in the company a clear insight into the company’s financial standing, its performance, and its assets at any given point in time.
Those who have already registered a company in Hong Kong but believe that the most suitable course of action to be taken is that of halting all operations for a given period can choose to declare dormant status for their company.
Definition of a Dormant Company
A dormant company is a company that neither records nor generates any accounting transactions over the course of one fiscal year. During this period, the company does not carry out any significant financial transactions.
This does not mean that the company is unable to carry out any financial transaction of any form, however. A significant financial transaction is defined as a transaction considered to warrant a mention in the company’s accounting records.
Not every company in Hong Kong is allowed to become dormant; only private companies may do so. Companies which are not private do not have the option of pursuing dormancy. Hong Kong companies which engage in foreign trade are also prohibited from dormancy.
How Companies Become Dormant
In Hong Kong, a declaration of dormancy is not automatically made when a company is unable to make significant financial transactions over the course of one fiscal year. Companies in Hong Kong must explicitly declare dormancy before they may be catalogued as dormant. There is a process of declaring dormancy in Hong Kong; this process will be detailed in the following paragraphs.
The first step a company must take towards applying for dormancy is to have a majority of its members sign a special resolution. This majority must be 75% of the members of the company or more. This special resolution document would then be submitted to the directors of the company. With this document, the directors can then make an official statutory declaration of dormancy. After declaring the state of dormancy, the directors will then submit proof of dormancy in the form of a confirmation statement of the declaration to the Registrar.
From the moment that the document is submitted to the Registrar, the company is immediately considered to be a dormant company unless the document specifies a later date from which it is to become dormant.
Exemptions for Dormant Companies
When a company is declared dormant, there are several exemptions which they may receive. A dormant company is exempted from filing annual returns because without accounting transactions being made, there are no annual returns to be filed. Dormant companies also do not have to make audited financial statements. This also means that all parts of the Companies Ordinance which are related to auditors and auditing processes do not apply to dormant companies. Dormant companies are also exempted from having to hold annual meetings because all the issues which would normally have to be discussed do not apply to dormant companies.
Reasons Why Companies Become Dormant
There are several reasons why companies choose to become dormant. One of these is to allow the company to save time and money which would otherwise have been used to file annual returns and prepare audit books. These actions are necessary but time-consuming and costly. Thus, company owners who feel that their company is not in a position to spend the time and money required for those purposes might choose to make the company dormant.
Companies which decide to go on hiatus from active trading also have the option of becoming dormant. Company owners who choose to make the company dormant will have additional options in the future because dormancy provides company owners with the option of revitalization at some point. Such an option cannot be taken by company owners who choose to completely close down the company. Any company owner in Hong Kong is allowed to maintain a company’s dormancy for as long they desire. The only requirement placed upon such company owners is adherence to all the laws and regulations which govern dormant companies.
Some company owners choose to make their company dormant to protect its name. Making a declaration of dormancy allows the company to retain its name as well as any intellectual property belonging to the company. This therefore prevents anyone who may have malicious intentions against the company from sabotaging the reputation of the company and thus making it less appealing to investors and the general public.
Another reason why dormancy of a company might be preferred in some cases occurs when the company owners intend to have a company already set up for future use. In such cases, the company might be ready to be set up, but not be in any condition to begin business operations. Company owners who own such a company ought to file for dormancy because doing so would provide the company owner with the ability to protect the company’s assets.
Primary Benefit of Having a Dormant Company
The primary benefit of having a dormant status is that a company can exempt itself from most annual obligations that other active companies have to make. This therefore allows the company to be run at the lowest possible maintenance cost.
How Companies Cease to be Dormant
In Hong Kong, it is not difficult for companies to re-enter the business community as active companies after they have been dormant for some time. The process of ending a company’s dormancy is somewhat similar to the process of beginning a company’s dormancy.
To end dormancy, a dormant company has to draft and pass a special resolution. This new resolution states that the company is about to become active. After the directors of the company have received this resolution, they submit it to the Registrar. Once the Registrar has accepted the information contained within the resolution, the company will no longer be dormant.
Legal Requirements of a Dormant Company in Hong Kong
Dormant companies in Hong Kong have certain requirements to be fulfilled. Dormant companies are required to pay an annual business fee for the purposes of registration. They are also required to file tax returns. With regard to personnel, a dormant company is required to have a minimum of one director, one company secretary, and one shareholder. Every dormant company is also to have a registered business address so that people will find it easier to contact the company.
There are also several other rules which have been drawn up and are specifically targeted at dormant companies. Owners of dormant companies have to follow these rules which have been set up for their companies. Failure to adhere to these rules constitutes a violation of Hong Kong laws and will cause suitable punishments to be imposed on the companies and company owners which have broken the law.
Types of Companies that Cannot Apply for Dormancy
Not every company based in Hong Kong is allowed to become dormant. Hong Kong’s company laws state that certain companies are barred from doing so. In Hong Kong, there are five types of companies which are prohibited from becoming dormant. These companies include all financial institutions according to the Banking Ordinance, registered dealers overseen by the Commodities Trading Ordinance, companies which serve as licensed foreign exchange traders, any insurers as stipulated by the Insurance Companies Ordinance, and investment advisors registered under the Securities Ordinance.
Dormant Companies in Hong Kong FAQs
Dormant companies have not been permanently closed. Dormant companies are companies which are on a hiatus from all accounting transactions for one fiscal year or longer. For this reason, dormant companies may be revived at any point in time which the owner of the company deems to be suitable.
Dormant companies are not taxed because during the period for which they are dormant, they do not carry out any accounting transactions that can be taxed. A dormant company may only be taxed after it has become active.
The owner of a company does not necessarily suffer after the company becomes dormant. However, the primary disadvantage that the owner and the company might suffer from is the fact that the company is neither functional nor profitable during the period which the company is dormant. Once the company returns to activity, it may once again begin to function and generate profits.