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In times of economic hardship, every business owners may find it necessary to make a difficult decision to close your business due to various factors such as financial challenges, poor performance, increasing rent and labor costs, or internal issues.
If you're considering close down your business, this article will guide you through the potential solutions for closing your companies in Hong Kong. We will cover the conditions and procedures for deregistering a company, as well as address some frequently asked questions.
It's important to note that the closure procedures differ significantly between limited companies and unlimited companies. The requirements and processes for shutting down a business are often more complex than those for establishing one. Several declaration procedures must be completed, and numerous preparations are needed in advance.
Biz & Bird will break down these aspects step by step, ensuring that every business owner has a comprehensive plan before proceeding with the actual closure.
How to Close a Limited Company in Hong Kong?
A limited company in Hong Kong can be dissolved in two primary ways: through "deregistration" or "liquidation".
If a limited company has no outstanding liabilities, or if its shareholders are prepared to settle any debts, it can opt for "deregistration." This method is more cost-effective and straightforward, typically taking between six months to a year to complete. This article will focus on the deregistration process.
On the other hand, if a company cannot meet its financial obligations to repay its liabilities, it must be dissolved through "liquidation." This approach is more complex and costly, often taking several years to finalize.
How to Close an Unlimited Company in Hong Kong?
An unlimited company can be closed by simply canceling its business registration if it has no outstanding liabilities.
However, if the sole proprietor or partner is unable to settle the company's debts, they will face unlimited liability, as the company is essentially an extension of the individual.
In this case, the proprietor or partner has to file for personal bankruptcy to officially close the business.
Cancellation of Business Registration
Whether you operate a limited or unlimited company, the Inland Revenue Ordinance requires that any individual who ceases business operations or closes a branch must inform the Business Registration Office in writing.
This notification must be submitted within one month from the cessation date, using the Notification of Cessation of Business Form IRC3113, which should be returned to the Inland Revenue Department.
Companies that have not been fully deregistered in accordance with the Companies Ordinance will still be considered active businesses and will be required to pay the annual business registration fee until the closure is officially completed.
If a company has outstanding tax filings from previous financial years, the IRD will send a tax return form to the holder of the business registration certificate to complete the final tax declaration.
What is Company Deregistration?
Company deregistration refers to the process through which a limited company that is no longer operational and capable of repaying its debts formally closes its business.
This involves navigating a series of legal and administrative steps, including canceling the business registration, applying for a notice of no objection, and submitting a request to remove the company from the Companies Registry. Deregistration is generally a simpler and more cost-effective method of closing a business compared to liquidation.
If a company fails to apply for deregistration and complete the necessary cancellation procedures within the statutory timeframe, both the company and its directors may face penalties, including fines of up to $5,000 and possible imprisonment for one year.
Biz & Bird advises all business owners that the deregistration process is essential and cannot be overlooked. If you are unfamiliar with the procedure, it is highly recommended to seek assistance from a secretarial company to ensure compliance with the law.
Can Any Company Apply for Deregistration?
Not all companies are eligible for deregistration; this option is limited to local private companies and companies limited by guarantee. Certain entities specified in section 749(2) of the Companies Ordinance are excluded. To qualify for deregistration, the applicant company must be non-operational and capable of settling its debts, and it must meet the following requirements.
What Are the Requirements to Apply for Deregistration?
To be eligible for deregistration, a limited company must meet the following criteria:
ALL members of the company must agree to the deregistration;
The company must not have commenced operations, or it must have ceased operations within the three months prior to the application.
the company has no outstanding liabilities;
the company is not a party to any legal proceedings;
the company’s assets must not include any immovable property located in Hong Kong;
if the company is a holding company, none of its subsidiary's assets may hold any immovable property located in Hong Kong; and
the company must obtain a "Notice of No Objection to a Company being Deregistered" ("Notice of No Objection") from the Inland Revenue Department, indicating that all corporate taxes have been settled and all tax returns have been filed.
Given the stringent nature of these requirements and the need for thorough preparation, Biz & Bird advises companies to start the process as early as possible to avoid potential delays and fines.
Steps for Deregistering a Limited Company
1) Obtain Shareholder Consent
Directors and shareholders must hold a general meeting to pass the necessary resolutions for deregistration. All shareholders must attend the meeting and unanimously agree to the resolution.
2) Complete Statutory and Tax Obligations
Ensure that the company has fulfilled all statutory requirements under the Inland Revenue Ordinance and the Companies Ordinance. This includes confirming that profit tax returns, annual returns, and employer tax returns have been filed for previous years.
Additionally, check for any outstanding inquiries from the Inland Revenue Department, unresolved objections or appeals regarding tax assessments, and ensure all taxes (including profits tax, property tax, stamp duty, and any related fines or court fees) are paid.
3) Repay Liabilities and Distribute Assets
Before applying for a notice of no objection, the company must settle all outstanding liabilities, including profits tax, business registration fees, rent, management fees, and supplier payments. Any remaining assets should be distributed, as once the company is dissolved, its assets will become government property and may be difficult to reclaim.
4) Apply for a Notice of No Objection
Fill out Form IR1263 and submit it along with the required fee to the Commissioner of the Inland Revenue Department. The department will review the application to ensure all taxes are settled and will issue a notice of no objection if approved.
5) Submit Application to the Companies Registry
After receiving the notice of no objection from the IRD, file the Application for Deregistration of Private Company or Company Limited by Guarantee (NDR1) with the Companies Registry, along with the deregistration fee.
6) Complete Deregistration
If the application is approved, a notice of the company’s deregistration will be published in the Gazette. If no objections are raised within three months of this announcement, the deregistration process will be finalized, and the applicant will be notified accordingly.
FAQ
How Long Does It Usually Take to Deregister a Company?
The duration for deregistering a company varies based on its specific circumstances.
Typically, the entire process takes a minimum of 6 months to a year. If the company has outstanding liabilities, is involved in legal proceedings, or has pending auditing and tax requirements, the deregistration process may take longer than for companies without such issues.
What Fees Are Associated with the Deregistration Process?
The fees involved depend on the company's situation and may include outstanding taxes, business registration fees, fines, government deregistration fees, and audit tax filing fees. The total cost will vary based on the specific procedures the company must complete.
Do I Still Need to Submit Annual Returns (NAR1) and Pay Business Registration Fees After Applying for Deregistration?
Yes, even after submitting an application for company deregistration, the company is still required to submit annual returns (NAR1) and pay business registration fees on time until it is officially delisted by the Companies Registry.
How Should a Company's Assets and Cash Be Handled After Deregistration?
Once a company is deregistered, its assets will be considered ownerless property and will belong to the HKSAR Government. If there are any remaining assets under the company's name, the owners should discuss and arrange for their distribution before applying for deregistration. After the company is officially deregistered, these assets will become government property.
Do I Still Need to Keep Company Records After Deregistration?
Yes, under the Hong Kong Inland Revenue Ordinance, all companies, including those that have been deregistered, are required to retain company documents, records, and tax returns for at least seven years. The Inland Revenue Department retains the right to inspect these records during this period.
Can I Restore a Company After Deregistration?
Yes, it is possible to restore a company that has been deregistered. However, this process involves a series of legal steps, including applying to the Court of First Instance for re-registration. Biz & Bird recommends seeking professional legal advice prior to pursuing this option.
Can a Delisted Company Be Reinstated?
A company is typically forcefully deregistered by the Companies Registry due to the failure to submit annual returns on time.
If a company has been delisted for this reason, it can apply for reinstatement through "administrative restoration". This application must be made within 20 years from the date of dissolution. For more information, please reach out to the company secretarial team at Biz & Bird.
Conclusion
When it comes to ceasing operations in Hong Kong, Biz & Bird advises all business owners to not only fulfill tax and statutory requirements but also to manage relationships with employees, customers, suppliers, and other partners effectively. This includes properly handling employee layoffs and informing customers and suppliers about the decision to close the business.
We hope this article helps companies contemplating closure to grasp the importance and intricacies of the deregistration process. It encourages a comprehensive evaluation before making a decision and outlines the best practices for closing a business.
As highlighted, the deregistration procedures can be complex. At Biz & Bird, we offer professional company deregistration services to guide you through the entire deregistration process in a compliant manner. For more information, please call (+852) 6502 7845 or WhatsApp us today!