If you plan to set up a Hong Kong company, then preparing financial statements is a must. This is one of some compliance requirements that every company in this city must follow on an annual basis. Before conducting, it is crucial for a company to know about Hong Kong financial year and how to choose it.
1. An overview of Hong Kong financial year end
1.1. What is a financial year?
A Hong Kong fiscal year or financial year refers to a period of 12 months used for accounting purposes of the company. To simply put, companies will base on the financial year to calculate their profits and losses and prepare their financial reporting.
Under the new Companies Ordinance, the first financial year of one company would commence on the first date of its accounting reference period and closes on the final date of that period. The accounting reference period is simply understood as the reporting period covered by the financial statements.
1.2. What is a financial year end?
A financial year end (FYE) is the closing date of the company’s financial year.
Remarkably, Hong Kong allows companies to self pick the date on which they end their financial year. It is directors of your company who would have the ability to decide the FYE date for the company.
Furthermore, there is no obligation that the FYE of a Hong Kong company must follow its date of incorporation. Note, however, that the first financial year end of that company cannot exceed 18 months since its incorporation.
1.3. Benefits of choosing the right financial year end in Hong Kong
Hong Kong financial year end dates have a strong linkage with the filing of the bookkeeping and account records by a business. Choosing a suitable FYE is actually very crucial since it can considerably influence the company operation, along with its tax benefits.
Particularly, a wise choice of financial year end date can bring a Hong Kong company various benefits, keys of which are:
- Lower accounting fee and auditing fee
- Extend due date for tax reporting
To give an example, the FYE date your company has determined will also decide the due date when your company is required to pay tax. The due date of paying tax often falls into a few months since your filing of profits tax return.
The company A determined its FYE date falling onto 30 June 2018. According to Hong Kong reporting rules, the standard filling date in respect of this Accounting Date Code “N” shall be no later than 2 May 2019, and there is no extension allowed for profits tax return in such case. As a consequence, company A can be required to pay profits tax in around August 2019. If this payment deadline, unfortunately, fights with the company A’s peak season or happens in the period it is dealing with some cash flow problems, then it can increase the heavy burden of accounting on the company. This is why it is very crucial to pick an appropriate financial year in Hong Kong.
Profits tax return filing is one of the key annual compliance duties for any Hong Kong companies. For more details on what compliance requirements in Hong Kong are, you can find out more here: Hong Kong Company Annual Compliance Requirements
2. How to determine a right financial year in Hong Kong
When it comes to the determination of the financial year end for a Hong Kong company, there are some parameters that should be taken into account. Below are 3 main factors for your reference:
Accounting factor. Choosing a right FYE for your Hong Kong company can lead to a less complicated accounting process for your business. Suppose you incorporate a holding company in Hong Kong. By consolidating the FYE date with subsidiary companies, accountants of both sides can effectively complete the financial statements. The auditing process is also easier to be done. As a result, your company can save a large amount of money incurred from accounting and auditing tasks.
You can give BBCIncorp’s Accounting Tool a try to find out the total yearly estimated cost for accounting of your Hong Kong company!
Taxation factor. Filing profits tax returns is required to comply with most Hong Kong based companies. And it is a must to declare your company’s FYE before filing. Fiscal year end determination will impact the deadline for your Hong Kong company’s profits tax return.
Hong Kong government typically offers further extensions for Hong Kong companies which determine their FYE on 31 March or 31 December. Most companies in Hong Kong tend to choose this point of time as their financial year end to match with the government’s fiscal year. This means they can have more time to prepare the financial statements of the company.
|For financial year ended||Standard Filing Date for unrepresented/ represented cases||Due Date for Profits Tax Return Extended|
|Between 1 April and 30 November (Accounting Date Code “N”)||2 May||No further extension|
Normally end of April
|Between 1 December and 31 December (Accounting Date Code “D”)||2 May/ 15 August||Extended to 30 September|
|Between 1 January and 31 March (Accounting Date Code “M”)||2 May/ 15 November||Extended to 30 November|
* Normal Issue Date: The first working day in April of the following year of assessment
Business nature factor. This is another worth-mentioning aspect to consider. Typically, most companies tend to choose a fiscal year end as the completion of any quarter, March 31, 30 September or December 31 for example, to match their business cycle.
Reason for this can be explained by the fact that some businesses feel easier because of their seasonal business nature which may have some differences in sales and activities until the end of the quarter. For example, some big sales over the holiday and seasons of a retail business may lead it to decide 31 December as its FYE date. A company with its core business in the summer, on the other hand, is likely to pick a 30 September year end.
3. Can a Hong Kong company change its financial year end?
The answer is YES. A Hong Kong company is free to determine its own fiscal year end date and allowed to change it, providing that it has good reasons.
Below are some common cases from which a Hong Kong company may want to change its current fiscal year end:
- It is a newly established company in Hong Kong, and it has missed out the chance to pick its own FYE. The fixed date is determined as the final date of the month of the first anniversary from the company incorporation, as automatically determined by Hong Kong authority.
- It is an existing company with its annual profits tax return to coincide with the company’s high season.
- It is a subsidiary company, and it wishes to consolidate its FYE with its parent company to make the accounting process easier.
While Hong Kong environment is very friendly to allow the company to change its financial year end, there are still some notes before adjustments. Particularly, the Hong Kong company may be required to ask for the approval of its shareholders for the first change. In case of a company limited by guarantee, the change of its FYE must be notified to the Companies Registries during 15 days.
The interval between the first change of the financial year end date of your company and the next one must not be less than 5 years, except the adjustment with convincing reasons.
A wise Hong Kong financial year determination is very important to help your company with an easier accounting process and save money. There are certain factors to consider before choosing your ideal financial year end in Hong Kong, among which accounting aspect, tax aspect and business nature are key things. As a Hong Kong based company, you are allowed to change your company’s FYE with good reasons.
Feel free to contact BBCIncorp if you need more practical advice on how to choose a right financial year end for your Hong Kong company!