Business Recordkeeping In Hong Kong: What Are The Requirements?

Keeping records in Hong Kong is a must for businesses operating in or from the region. Not only for mere regulatory compliance, recordkeeping is also necessary for smooth business operations. Further, you might be fined up to HK$100,000, plus potentially daily penalties if you fail to comply with these requirements or even jail time for the owners.

This article will outline what documents to keep, how long they should be retained, and how to prepare for audits and inspections. Read more to stay compliant, scale effectively, and position your business for long-term success in this brilliant jurisdiction!

Legal requirements for business recordkeeping in Hong Kong

Hong Kong businesses must adhere to strict legal obligations regarding recordkeeping, primarily governed by the Companies Ordinance (Cap. 622) and the Inland Revenue Ordinance (Cap. 112). The aim of these regulations is to promote transparency, accountability, and compliance with both financial and tax laws.

However, compliance goes beyond just knowing the laws. Here are key factors Hong Kong businesses should keep in mind to maintain proper recordkeeping.

Key requirements for recordkeeping

Under the Inland Revenue Ordinance, Hong Kong businesses must maintain financial records that:

• Accurately reflect their financial position and performance, in either Chinese or English;
• Include detailed accounting documents that clearly explain and support the company’s transactions.

For example, a construction company would need to retain records of all contracts, invoices for building materials, Hong Kong payroll records for workers, and payments made to subcontractors. A consulting firm, on the other hand, would keep track of client contracts, service invoices, and employee expenses.

In order to retain a good standing, a comprehensive system to track businesses’ financial activities, readily reviewed by auditors, tax authorities, and other stakeholders, is crucial.

Electronic recordkeeping regulations

Businesses are allowed to use electronic recordkeeping systems, but source documents such as cheque stubs, invoices, bank deposit slips, and statements must still be retained to substantiate income and expenditure.

Storage alternatives

Retaining images of original documents on CD-ROMs, DVD-ROMs, or USB drives is acceptable as an alternative to keeping physical documents. If a document is originally created in electronic form, it qualifies as an electronic file and does not need to be converted into paper format for storage. Instead, it can be stored directly on a digital management platform.

Legal compliance with the ETO

The Electronic Transactions Ordinance (Cap. 553) recognizes electronic records as valid substitutes for physical documents if certain conditions are met:

• Accessibility for reference

Electronic records must remain accessible and usable for future reference. They should be retrievable without loss of clarity or detail.

• Original or equivalent format

The documents should be retained in their original electronic format or in a certified equivalent format that accurately represents the main document.

• Key details for verification

Records must consist of essential metadata such as the one who created or sent the document, the one who received it, when it was sent or received, etc.

Retention period for business records

Under Section 51C of the Inland Revenue Ordinance (IRO), companies in Hong Kong must retain sufficient records of income and expenditure to allow assessable profits to be clearly determined. These financial records must be kept for at least seven years from the date of the transactions they relate to.

This requirement ensures businesses maintain adequate documentation to support tax returns and financial statements, especially during audits by the Inland Revenue Department (IRD).

To exemplify, a company making purchases in 2024 must retain related invoices and receipts until 2031. Similarly, tax returns filed for the 2024 financial year should be supported by records from 2017 onwards.

In addition to fulfilling obligations, the seven-year retention period promotes transparency and protects businesses in the event of a tax dispute or inquiry.

Penalties for non-compliance

Failure to comply with legal requirements can result in significant penalties. As stated in the Companies Ordinance and the Inland Revenue Ordinance, businesses may face fines of up to HK$100,000 for each offense related to recordkeeping violations.

Moreover, company directors can be held personally liable for the crimes. In serious cases, failing to archive proper records could lead to criminal charges, with penalties including potential jail time for directors.

Hence, proactive compliance with Hong Kong regulations minimizes the risk of encountering legal complications. Strictly embracing transparency safeguards the company and fosters trust with stakeholders, laying a solid foundation for success in the long run.

Types of records businesses must maintain

Below is a breakdown of the key types of records businesses must retain:

Financial records

Per the IRD’s requirements, the mandatory financial records include:

• Income statements: Reflecting the company’s revenue, expenses, and profitability over a specific period.
• Cash flow statements: Cash flow statements report cash inflows and outflows, highlighting liquidity.
• Asset and liability records: Documentation of all assets and liabilities of the person related to the trade, profession, or business (e.g. a balance sheet)
• Records for service provision: Details on accounts of any service provided, where that trade, profession, or business involves the provision of services.
• Daily transaction records: Entries of all sums of money received and spent in connection with the trade, profession, or business.
• Additional financial records: Sales and purchase records, vouchers, and receipts of expenditure.

The enterprise must also submit information on where the trade, profession, or business involves goods transactions:

• Descriptions of the goods, the seller and buyer, quantities, and values of all goods bought and sold, as well as invoices, so as to facilitate the Commissioner’s verification.
• Records of stocktakings used to prepare the accounting statements, along with statements of trading stock at the end of the accounting period.

Tax records

Keeping comprehensive tax records is essential for navigating Hong Kong’s tax regime, which is lauded for its simplicity and efficiency. Businesses must make sure that their tax documentation is complete and well-organized to meet the requirements of the Inland Revenue Department (IRD) and fully leverage Hong Kong’s favorable tax environment.

Tax records that companies are required to retain include:

• Tax returns and assessments: These documents state the business taxable income, deductions, and tax payable to the IRD.
• Notices and correspondence: Government notices, inquiries about tax returns, adjustments, and other related paperwork.

Employment records

Next are the documents related to employment. These are essential for regulatory compliance and operational accountability:

• Employment contracts: Clearly defining roles, responsibilities, and terms of employment.
• Payroll records: Providing detailed accounts of salaries, bonuses, deductions, and Mandatory Provident Fund (MPF) contributions.
• Leave records: Tracking annual, sick, and other types of employee leave.

Preserving these records aligns with the Employment Ordinance and serves as vital evidence in labor disputes or inspections by the Labour Department. In reality, payrolls and contracts can substantiate compliance in cases involving wage disputes or termination claims, while leave documentation demonstrates adherence to statutory requirements.

Corporate records

Finally are the corporate records, which consist of:

• Minutes of meetings: Summaries of board or shareholder meetings, capturing critical discussions, decisions, and resolutions.
• Board resolutions: Official documentation of significant decisions, such as appointing directors, issuing shares, or approving major financial transactions.
• Shareholder agreements: Contracts define the rights, obligations, and relationships among shareholders, often used during mergers, acquisitions, or funding rounds.

For instance, a startup securing investment must produce shareholder agreements and board resolutions to finalize funding terms. Corporate records are to demonstrate accountability and are often requested during audits, legal proceedings, or by potential investors.

Best practices for effective recordkeeping

Proper records are the foundation of compliant and precise financial management, enabling seamless operations like bookkeeping, audits, tax filings, and more. Therefore, mastering precise recordkeeping techniques is a critical skill for any business.

Let us explore a few key methods to enhance your recordkeeping process right below.

Use of technology

Leveraging innovative technology is a crucial step for efficient bookkeeping and overall business success. This is because digital storage solutions and specialized software empower your company to automate data storage processes and integrate with other accounting systems, streamlining bookkeeping tasks efficiently.

Cloud-based platforms, for example, allow secure storage and easy access from any location. Modern accounting software automatically tracks transactions, categorizes expenses, and generates reports, reducing the time spent on manual data entry and minimizing human error.

Standardize documentation procedure

Standardizing documentation procedures helps preserve the accuracy and reliability of records. As a result, they significantly ease tasks like preparing financial statements and tax computations.

This practice includes using consistent formats for invoices, receipts, and financial statements. In addition, routine audits and internal reviews help identify any discrepancies or missing information. These audits should be conducted periodically to catch issues early and avoid complications during external inspections.

Training your team on recordkeeping protocols

Equipping your team with recordkeeping knowledge is important, regardless of their position. The reason for regular training is to make sure all team members are aware of the common mistakes and their consequences so that all team members understand their responsibilities.

Furthermore, workshops on legal updates equip staff to adapt to new standards effectively, especially when paired with practical examples from the company’s experience. This hands-on approach makes the training both relevant and actionable.

Partnering with BBCIncorp – Your trusted management support

Why struggle alone when expert support is just a step away? BBCIncorp offers the needed solutions for Hong Kong businesses, covering everything from precise recordkeeping to comprehensive bookkeeping.

Our team takes care of financial document management, accurate reconciliation of bank statements, and even data input into accounting tools like Xero. All while keeping you updated!

Discover how our Hong Kong bookkeeping services help you tackle challenges now!

Conclusion

Business owners operating in Hong Kong are required to keep accurate financial records, including invoices, receipts, bank statements, and payroll documents, for at least seven years as required by the Inland Revenue Department (IRD).

This article has covered the key requirements, types of documents involved, and best practices to help you meet these obligations with confidence. However, partnering with local experts offers even greater peace of mind.

If you need professional support with record or bookkeeping, don’t hesitate to reach out! Email us at service@bbcincorp.com for timely assistance today.

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