What’s in this article
- Definition of a Dormant Company
- How Companies Become Dormant
- Exemptions for Dormant Companies
- Reasons Why Companies Become Dormant
- Primary Benefit of Having a Dormant Company
- How Companies Cease to Be Dormant
- Legal Requirements of a Dormant Company in Hong Kong
- Types of Companies that Cannot Apply for Dormancy
- FAQs
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 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 one fiscal year. Companies in Hong Kong must explicitly declare dormancy before they may be catalogued as dormant. There is a process for 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 exempt from annual meetings since typical business issues do not apply to them.
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. Dormancy gives company owners future options by allowing revitalization of the company when needed. Such an option cannot be taken by company owners who choose to completely close down the company.
Reasons for Maintaining a Dormant Company in Hong Kong
Any company owner in Hong Kong is allowed to maintain a company’s dormancy for as long as 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 should file for dormancy to protect the company’s assets until it’s ready for operations.
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, dormant companies can easily rejoin the business community as active companies after a period of inactivity. 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 registration. They are also required to file tax returns. Regarding personnel, a dormant company is required to have a minimum of one director, one company secretary, and one shareholder. Every dormant company must have a registered business address for easier contact and communication.
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 follow these rules violates Hong Kong laws, leading to penalties for the company and its owners.
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 financial institutions, licensed traders, insurers, and investment advisors regulated under various Hong Kong ordinances.
FAQs
The differences between GAAP and IFRS can be illustrated in the table below:
| Aspect | GAAP | IFRS |
|---|---|---|
| System | Rules-based | Principles-based |
| Level of Detail | More detailed | Less detailed |
| Interpretations | Specific | More room for interpretation |
| Financial Statements | May necessitate long disclosures | May require detailed financial notes |
| Inventory Treatment | Allows last-in, first-out (LIFO) | Bans the use of last-in, first-out (LIFO) for inventory |
| Weighted Average-Cost Method | Allows FIFO method | Allows FIFO method |
| Inventory Reversals | Doesn’t allow inventory reversals | Allows inventory reversals (in certain situations) |
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.
Share This Story, Choose Your Platform!
More Business Insights
Corporate Tax in Hong Kong
The F&B Industry of Hong Kong
Company Constitutions in Hong Kong
Brief Introduction to Hong Kong’s Business Law
Can a Hong Kong company also have been Incorporated in another Country at the same time?
