If you have an inactive company, or where you registered a company for a specific project but that project for whatever reasons has been postponed and you may need to use that company again in the future, it may be cost effective to declare it in dormant status. If the company is dormant it does not have to file an annual return, hold an AGM, prepare audited accounts or appoint auditors. That means savings on both time and money.
Definition of Dormant Company
The term “dormant” applies to a Hong Kong limited company that, in legal terms, has “no significant accounting transactions” during a financial year. It is not the same as a “non-trading company”, a term that has no legal meaning. No significant accounting transactions means no entries in the company’s accounting records. The amount paid for shares when the company is first formed and a few costs that the company may incur in order to keep the company registered at Companies Registry do not count as significant accounting transactions.
Difference between a Non-Trading Company and a Dormant Company
A company can be non-trading in the sense that it isn’t doing business. But it may still have other accounting transactions going through its books, which means that it is not dormant in a legal sense. A dormant company must not have any accounting transactions except specific allowable transactions that can be disregarded.
Reasons for application for Dormant Status (Dormant Company)
Companies can be dormant for various reasons, often to protect a company name, in readiness for a future project, or to hold an asset or intellectual property. Some flat management companies whose main purpose is to own the head lease, or the leasehold of a property choose to become dormant by setting up a resident’s association to deal with any expenses.
A company can remain dormant for as long as necessary – indefinitely if, for example, its purpose it just to prevent the name being used by another company. However, there are expenses associated with keeping a company on the register.
The Responsibilities of the Officers of a Dormant Company
The responsibilities of a dormant company’s officers are the same as for those of a trading company. The directors and secretary manage the company on behalf of the shareholders or members. Among other things, they are responsible for holding meetings and ensuring that all the necessary returns and other documents reach Companies Registry by the due date.
Application for Dormant Status
To become “dormant” the company must pass a special resolution authorizing its directors to make and deliver to the Registrar of Companies a statutory declaration to the effect that the company will be treated as a dormant company.
A company will be eligible to apply for dormant status if, since the date of incorporation or any other specified date, it has not entered into what is known as a “relevant accounting transaction”. A “relevant accounting transaction” is a transaction which is required by section 121 of the Companies Ordinance to be entered into the company’s books of account. This includes the receipt and expenditure of money and the sale and purchase of goods, assets and liabilities, but does not include a fee which a company is required to pay by law, for example the annual business registration fee. Prior to a company ceasing to be dormant, the directors must deliver to the Registrar a further statutory declaration that the company intends to enter into a relevant accounting transaction, at which stage the company will cease to be dormant and the normal requirements will apply again. The advantage of being able to put a company into dormancy is that the cost of maintaining the company can be significantly reduced without having to wind up or apply to the Registrar to de-register the company.
Continuing Obligations of Dormant Companies
A dormant company still has to:
1. Maintain 1 director, 1 shareholder, a company secretary and a registered office;
2. report any changes in its officers or registered office to the Registrar; and
3. file an Annual Return within 42 days after the anniversary day
4. pay the annual BR fee of HK$2600 to the Government
Cessation of Dormant Status
It is possible to reverse the dormant status if the company is going to start doing business again. All that has to be done is to advise the Registrar by filing a statutory declaration.
Is it necessary for a dormant company to prepare audited accounts before completing the Profits Tax Return?
Even if you are a dormant company, you still have to submit audited accounts in support of the return unless you are a dormant company within the terms of the Companies Ordinance.
Under the Companies Ordinance, a company may pass a special resolution authorizing its directors to make a statutory declaration that the company will become dormant and to deliver a copy of the statutory declaration to the Registrar. Upon delivery of the statutory declaration, the company shall be deemed a dormant company as from the date of such delivery. If the declaration specifies a later date for the company to become dormant, the company shall be deemed as from that later date. A company so deemed is exempt under the Companies Ordinance regarding audited accounts. Accordingly, a profits tax return could be submitted without the supporting audited financial statements.
In the case where the Company is no longer required
If you decide that you do not need your dormant company, you can arrange to have it struck off (deregistration) the register. There are two ways of doing this: if the company has no debts or other liabilities, you may be able to apply for ‘voluntary striking-off and dissolution’ without going through formal insolvency proceedings; or if the company has affairs to wind up, then the company can be put into “voluntary liquidation”.