As an international business hub, Hong Kong attracts many entrepreneurs to register companies here. However, after many entrepreneurs register their companies, they may not have actual business for various reasons. Such companies are called “zero-operation companies”. Many people have a common misunderstanding that companies without business activities do not need to fulfill tax reporting obligations. But the actual situation is not the case. With the continuous strengthening of the supervision of the Hong Kong Inland Revenue Department, especially after the cancellation of the “zero reporting” system in 2023, the tax treatment of zero-operation companies has changed significantly.
What is a zero-operation company? How is it different from an inactive company?
A dormant company is still legally registered, but has no substantive business activities and does not generate any income or expenditure in a specific tax year. Such companies may be temporarily in a “dormant” state due to delays in business plans, changes in the market environment or strategic reserves, but they still retain the flexibility to resume operations at any time. A typical dormant state is characterized by: no sales or purchase records, no rent or salary payments, and no business-related transactions in bank accounts.
In contrast, an “inactive company” is a more stringent legal concept, which is specially regulated by the Companies Ordinance (Chapter 622). To obtain this status, a company must meet three core conditions: first, there must be no accounting transactions; second, there must be no funds flowing through the bank account for the entire year; third, it must proactively submit a special resolution and statutory declaration to the Registrar of Companies, and only after official approval can it be officially recognized as a dormant company.
The biggest advantage of dormant company status is that the administrative process is significantly simplified, and it can be exempted from the statutory requirements for preparing financial statements and submitting audit reports, thereby significantly reducing compliance costs. However, this status is also accompanied by strict restrictions. The company is not allowed to conduct any form of business operations, and even simple bank interest income may cause it to lose its dormant status. More importantly, when the company hopes to resume operations, it must submit an application to the Registrar and complete a complex activation procedure, which usually requires additional time and expenses.
Simply put, although a dormant company can simplify the administrative burden of finance and taxation, if you want to resume operations in the future, you need to apply to the government; while a zero-operation company needs to file tax returns as required, but it retains the flexibility of the company’s operations. If the company plans to resume operations in the short term, it will be more convenient to choose a zero-operation model.
Do zero-operation companies in Hong Kong need to file tax returns?
According to the Inland Revenue Ordinance (Chapter 112), all companies registered in Hong Kong, regardless of whether they are actually operating, must submit a Profits Tax Return (BIR51) to the Inland Revenue Department on time. If a company has no business activities during the tax year, it must declare the zero-operation status in the tax return and submit relevant supporting documents to prove that the company has no transaction records.
Even if the company declares zero operation, the tax bureau may still require verification, and the scope of the inspection covers the following aspects:
● Whether the company has bank account transaction records;
● Whether the company has paid rent or wages;
● Whether the company has conducted business-related contracts or transactions;
● Whether the company is involved in asset purchases or sales.
It is worth noting that once a company is found to have provided false information when declaring zero operation status, it may face fines or even criminal prosecution. In addition, even if a limited company is not operating, it must comply with the requirements of the Companies Ordinance, hire a practicing accountant to conduct an audit, and issue an auditor’s report. This is a necessary step required by law to ensure the transparency and compliance of the company’s financial records.
In short, in the context of increasingly stringent tax supervision in Hong Kong, zero-operation companies must not ignore their statutory responsibilities for tax reporting and auditing. Correctly understanding the tax requirements of zero-operation companies can not only avoid legal disputes, but also lay a solid foundation for future business development.
