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Being appointed as director of a company is rewarding. But with great powers, come great responsibilities!

In this guide, we look at directors’ duties in Hong Kong companies. We strongly advise you to get familiar with such duties before accepting to take the position of director of any company in Hong Kong.

Act in good faith

The director’s duty to act in good faith for the company is the cornerstone of its position. A director shall always act honestly and sincerely, with appropriate judgment. This is also known as acting bona fide.

A decision made in good faith is a decision taken genuinely for the benefit of the company. When making a decision, the director shall honestly believe it to be in the best interests of the company.

In other words, a director shall always give priority to the interests of the company before one of its shareholders. The director shall treat all shareholders equally and not favor one shareholder over another.

Practical tip: Before making any decision as director, always ask yourself whether the decision is in the company’s sole interest.

Make proper use of power

A director shall act within the scope and the terms of the powers granted to him/her. He/She shall not exceed these powers. The scope and terms of a director’s powers are normally detailed in the company’s constitution documents, shareholder resolutions, and shareholders agreement (if any).

A director should always be clear about the scope of its powers before acting.

A director shall also always use its powers properly, for the sole benefit of the company and not for private gain. Using the director’s powers for a personal benefit is considered an improper purpose.

Practical tip: When taking any action, check that (i) it is within your scope of powers (ii) it is not primarily motivated by your private interest.

Delegate powers only with authorization

A director is often required to sign documents or take actions in a short notice or at times when he/she is traveling. It is therefore common for a director to delegate part of its powers to someone within the company (senior management) or a third party (company secretary, attorney).

Before delegating any of its powers, a director shall always:

• Ensure that he/she is authorized to delegate such powers (based on the company’s articles of association or shareholder resolutions)
• Verify the capacity of the person to whom the director’s powers are delegated
• Prepare a proper document for the delegation of powers. This is generally known as power of attorney. The power of attorney shall include information as to the scope and term of the delegation

A proper delegation of powers normally protects the director. However, it is always recommended to review and confirm the actions taken by the beneficiary of the delegation of powers.

Practical tip: Verify that you are allowed to delegate your powers before doing so. Properly documenting the term and scope of any delegation of powers is absolutely crucial.

Exercise directors’ duties with care, skill, and diligence

A company’s director shall always act with care, skill, and diligence. This means the care, skill, and diligence expected by a reasonably diligent individual who:

• is a director of the same company in the same circumstances
• holds the same position held by the director
• has the same responsibilities as the director

There is no single standard of care, skill, and diligence that applies to all directors. Various factors are taken into account to appreciate whether a director has satisfied this duty. This includes:

• type of company
• nature of business (for example, certain activities may require a particular skill set)
• experience and skills of the director
• size of the company
• allocation of work among board members

Practical tip: keep yourself informed of the affairs of the company. Carefully review any document before signing it (especially the company’s audited accounts). Properly document and keep a record of your work as a director (notably in the minutes of the directors).

Address potential conflicts of interest

A director occupies a position of trust in the company. He/she shall never confuse its personal interests with those of the company.

There is no specific definition of a “conflict of interest.” Generally speaking, a conflict may exist where a director’s personal interests collide with the interests of the company. This includes actual or potential conflicts. Here are a few examples:

• a director will personally profit from a proposed deal
• sitting on the Board of a direct competitor without informing the company
• using the information to take advantage of a business opportunity that belongs to the company

Practical tip: Avoid putting yourself in situations of conflict of interest. Always take a step back and consider whether your decisions/actions are in the company’s best interest. It is a matter of good faith and common sense.

Disclose transactions involving a personal interest

A director shall not be involved in any transaction where he/she has a material interest.

A director shall proactively declare to the board/shareholders any direct or indirect interest in a transaction involving the company. The director shall also refrain from voting on such a transaction.

This duty is even stronger in the context of listed companies. Such companies have to maintain a detailed register of all the interests disclosed by directors.

Practical tip: Protect your personal liability by proactively declaring any personal interest that you may have in any transaction involving the company.

Do not abuse of directors’ powers

A company’s director shall never use its position to gain a personal advantage, to the detriment of the company.

This duty is closely linked to the obligations of acting in good faith and avoiding conflicts of interest.

Practical tip: Abuse of powers is a very broad principle. As a director, make sure that you could not be blamed from abusing of your powers against the company itself, but also its shareholders, employees, or business partners.

No use of property or information for personal interests

A director shall not use the company’s property or information for personal interests. This duty is also related to the obligation of avoiding conflicts of interest.

Practical tip: Take a step back and consider if your actions could be considered as primarily serving your personal interests. In case of doubt, disclose any direct or indirect personal interest to the board and the shareholders.

Personal benefits from third parties

A director shall refuse any benefits or gifts offered by a third-party in relation to his/her director’s position.

There are exceptions to this principle. In the event that (i) the company consented to the relevant benefit by ordinary resolution, (ii) the company conferred the benefit itself, or (iii) the benefit is necessary for the proper performance of your obligations as a director.

Practical tip: Do not accept gifts or benefits from third parties if they seem motivated by your position. If in doubt, simply refuse or consult with the company’s board and/or shareholders before acting.

Comply with the company’s articles of association

Any and all decisions of a Director shall be taken in accordance with the company’s Articles of Association.

In addition, a director shall always pay attention to the following:

• the Hong Kong Company’s Ordinance Cap. 622
• the various resolutions of the General Meeting of the shareholders and the board of directors
• the possible limitations to a director’s powers as expressed in its letter of appointment

Practical tip: A Director shall always consider whether his/her actions contradict or exceed the powers granted to him/her.

Maintain proper accounting records

A Director must ensure that the company’s accounting records are properly and timely maintained. He/She shall also verify that the accounting books give a true and fair view of the affairs of the company.

While a director is not an accountant, he/she is expected to understand the overall financial situation of a company. For example, a director shall not allow a company to take a loan if it is close to bankruptcy.

Practical tip: Do not approve any financial records if you do not understand them. Protect your personal liability by seeking external professional advice.

There are many duties and obligations attached to the function of director. This is the case in Hong Kong as well as in any other jurisdictions.

However, most problems can be avoided by applying common sense, good faith, and proper judgment. Consult with the board or the shareholders when facing difficult decisions or potential conflicts of interest.

When accepting a position as director, make sure that the scope of your powers (and their limitations) is clearly defined. Also, make sure that all your decisions as director are properly documented.

You have not yet registered your Hong Kong company or opened your business account?

You have not yet registered your Hong Kong company or opened your business account? Check our step-by-step guide to registering a company in Hong Kong in 2020.

Focus on your business, we take care of the rest.

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Any shareholder receives a share certificate at the time of its investment in a company.

This document is absolutely crucial as it evidences the shareholders’ ownership and participation in a company.

If you hold shares in a Hong Kong company, this guide explains everything you must know about your share certificate.

What is a share certificate?

A share certificate is a document issued by a company to its shareholders to evidence their ownership in that company.

A company may have one or more share certificates depending on the number of shareholders.

What information is included on a share certificate?

If you own shares of a company in Hong Kong, you should receive a share certificate with all details concerning your shares.

A share certificate normally includes the following information:

• the issuing company’s full name
• the shareholder’s names and contact address
• information on the number of shares held
• the classes or type of shares
• the share certificate number

A share certificate may include various other information.

For example, if a shareholder is restricted from selling its shares (based on the provisions of a Shareholders Agreement), it is generally a good idea to include a reference to this restriction on the share certificate.

If a shareholder holds different classes of shares of a company (for example ordinary and preference shares), it is recommended to issue separate share certificates for each class.

In the context of preference shares, it is also advised to include a brief description of the rights attached to such shares on the share certificate.

What does a shareholder certificate look like?

There is no standard or prescribed format. Please refer to the picture below for a sample of a share certificate issued by a Hong Kong company.

Share certificates issued by companies in other jurisdictions (Singapore, BVI, Delaware) usually follow the same format.

Who issues a share certificate?

A share certificate is usually prepared by the company secretary.

The company secretary normally also takes care of preparing all documents leading to the issuance of new share certificates (share allotment or share transfer documents).

Upon issuance, a share certificate shall be signed by at least two directors.

If the company has a sole director, then only one signature is required.

When to issue share certificates?

There are various occasions in which a Hong Kong company may issue share certificates to its shareholders:

• Incorporation: upon registration of a Hong Kong company, all its founding shareholders will receive a share certificate

• Share transfers: when a shareholder transfers all of its shares to purchaser, the company will issue a new share certificate for such shares in the name of the purchaser. The share certificate of the seller will be cancelled. In the event that the seller only sells part (but not all) of its shares, the original share certificate will be cancelled and be replaced by a new share certificate representing the number of shares still owned by such shareholder.

• Shares allotment: when a company allots new shares to existing or new shareholders, new share certificates will be issued accordingly.

• Loss of share certificates: when you lose share certificate of a private company, there is no formal procedure for the replacement of the share certificates. We recommend that you contact your company secretary who will be in charge of the reissuance of the share certificate.

How to keep your share certificate safe?

It is strongly advised to keep the share certificates of a company in a safe place.

To reduce the risks of loss, we recommend that your company secretary keeps such share certificates at its office together with the company’s statutory records.

You may also ask your company secretary to provide you with a certified true copy of such share certificates.

What is the difference between a share certificate and register of members?

The register of members of a Hong Kong company is a single document (usually a table) listing all shareholders of a company, their respective number of shares, the date on which they became or ceased to be shareholders of the company.

This document provides a comprehensive overview of a company’s past and current shareholding structure.

On the contrary a share certificate only evidences the ownership by a shareholder of a certain number of shares at a certain point in time.

What is the difference between a share certificate and a certificate of incumbency?

A certificate of incumbency is a document issued by a regulated third party (lawyer, public notary) and confirming certain information about a company such as its shareholders, ultimate beneficial owners, directors.

It is normally required when a company applies for the opening of a bank account, a public subsidy or a loan.

By contrast, a share certificate is issued by a company itself rather than by an independent third party.

When is a share certificate canceled?

When a person ceased to be a shareholder of a company, it shall return its share certificate to such a company.

An officer of the company (usually its company secretary) shall take care of canceling such share certificate, usually by affixing a “Cancelled” stamp on the certificate.

This officer will then update the company’s register of members to reflect the date on which such shareholder ceased own shares of the company.

You have not yet registered your Hong Kong company or opened your business account? Check our step-by-step guide to registering a company in Hong Kong in 2020.

Focus on your business, we take care of the rest.

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One of the primary reasons why a growing number of businesses have chosen Hong Kong as the place to set up their company is a very attractive tax regime.

Hong Kong has no VAT or consumption tax. Hong Kong does not levy tax on capital gains if you sell your company or business.

The main tax applicable to companies registered in Hong Kong is corporate income tax, commonly known as profit tax.

In this guide, we explain everything you need to know about your HK company’s profits tax, whether you reside in Hong Kong or overseas, and whether or not your company derives profit from Hong Kong.

Hong Kong’s territorial corporate tax system

One primary advantage of operating a business via an HK company is linked to Hong Kong’s “territorial tax” system.

This is a simple way of stating that an HK company is only required to pay tax on profits derived from its Hong Kong operations.

What is the offshore profit tax exemption?

The consequence of Hong Kong’s territorial tax system is that companies are not taxed on profits generated outside of Hong Kong.

Companies incorporated in Hong Kong but with no business and paying no tax there are commonly known as “offshore companies”.

Whether a company makes a profit out of a Hong Kong business is at the appreciation of the Inland Revenue Department and ultimately the courts.

Generally speaking, a company is eligible for the offshore status and profit tax exemption if:

• it has no customers or suppliers in Hong Kong
• it does not sell products or services in Hong Kong
• the products do not transit through Hong Kong
• it is not managed from Hong Kong

How do the flat tax and two-tier corporate tax rates work?

Hong Kong’s corporate tax system is usually described as a “flat tax”.

This is because the profits tax rate has for many years been fixed rather than progressive as in many other jurisdictions.

Hong Kong traditionally applied a single-tier tax system whereby limited liability companies and unincorporated businesses were taxed on their profits at fixed rates of respectively 16.5% and 15%.

This has changed since the assessment year 2018/2019 with the introduction of a two-tier profits tax system.

The purpose of this new tax system is to support and attract more SMEs to Hong Kong.

The two-tier system effectively introduces a reduced tax rate of 8.25% for the first HK$ 2 million profits generated by companies having business in Hong Kong.

In summary, companies having business in Hong Kong are now subject to the following profits tax rates under the two-tier tax system:

• incorporated businesses such as limited liability companies are subject to 8.25% profits tax on their first HK$2 million of profit. All subsequent profits are subject to profits tax at the rate of 16.5%
• unincorporated businesses (such as sole proprietorship) are taxed at 7.25% for profits up to HK$2 million. Additional profits are subject to tax at a rate of 15%

Some limitations were introduced to avoid abuses under the two-tier profits tax system.

In presence of a group of companies, only 1 is eligible for the two-tier profits tax regime.

This means that that you cannot split the same business between several connected companies to artificially reduce your overall profits tax rate.

You should also know that for the year of assessment 2018/2010 a one-off reduction of profits tax by 100% was approved subject to a ceiling of HK$20,000 per case.

The same one-off reduction for the year of assessment 2019/2020 was passed by HK Legislative Council on 19 June 2020.

Please keep in mind that the above developments on the two-tier profits tax system apply to companies having business in Hong Kong (usually referred to as onshore companies).

No profit tax applies in Hong Kong for companies whose profits are derived from a business outside of Hong Kong (known as offshore companies).

Tax Rate	Business in HK	Business in HK	No Business in HK
Assessable Profits	Corporation	Unincorporated Business	Corporation
Up to HK$2 million	%8.25	%7.5	%0
Above HK$2 million	%16.5	%15	%0

How to reduce your profit tax rate?

The Hong Kong profit tax system allows you to deduct various expenses from your company’s total turnover.

This helps reducing its net assessable profit (meaning the profit that will be subject to tax) and ultimately the tax your company pays.

Most expenses engaged by the company for the needs of its business operations are deductible.

This notably includes:

• rental for office and other real properties
• client and supplier entertainment expenses
• professional travel expenses
• salaries and director fees

As opposed to many jurisdictions, there is no cap on such expenses as long as they were effectively engaged in the context of your company’s business operations.

When to submit your company’s profits tax return form (BIR51)?

Each year, any HK company normally receives a Profit Tax Return Form (BIR51) from the Hong Kong Inland Revenue Department.

The purpose of this Profit Tax Return Form is to report to the Hong Kong government the amount of profit generated by your company and the subsequent profits tax payable for the relevant year of assessment.

Your company should normally receive its Profit Tax Return Form (BIR51) from the HK Inland Revenue Department during the first few days of April each year.

The deadline to fill in and submit your company’s Profit Tax Return Form is normally May 2nd.

However, you may apply for an extension (unless your company closes its financial year between 1 April and 30 November).

In other words:

• If your company financial year-end is between 1 April and 30 November, the deadline to submit your Profit Tax Form to IRD is 2 May, with no extension possible
• If your company’s financial year-end is between 1 December and 31 December, the deadline to submit your Profit Tax Form to IRD is also 2 May, with a possible extension until 15 August
• If your company’s financial year-end is between 1 January and 31 March, the deadline to submit your Profit Tax Form to IRD is again 2 May, with a possible extension until 15 November

Please refer to the table below for an easy recap:

 

Profit Tax Form (BIR51) Issuance Date	Financial Year End	Basic Deadline to Submit BIR51	Extension Upon Request	Deadline to pay tax
April 1st Each Year	btw 1 April and 30 November	2 May	N/A	As notified by the IRD butgenerally between November and April
April 1st Each Year	btw 1 December to 31 December	2 May	15 August	As notified by the IRD butgenerally between November and April
April 1st Each Year	btw 1 January to 31 March	2 May	15 November	As notified by the IRD butgenerally between November and April

Please note that if your company was registered recently, you will receive its first Profit Tax Return (BIR51) from Hong Kong’s Inland Revenue Department 18 months after its date of incorporation.

What documents must be submitted for the profit tax assessment?

Each year, your company needs to prepare and submit the following documents to the Inland Revenue Department as part of the profits tax assessment:

• The profits tax return (BIR 51) form received from the Inland Revenue Department
• A supplementary form relating to your company’s tax and financial data
• A certified copy of your company’s auditor report, balance sheet, profit, and loss statement
• A tax computation with the calculation of the profit or loss for the relevant financial year

If your company has not yet started to do business, then you are still required to fill in and submit a Nil Profit Tax Return.

Can my company be exempted from preparing audited financial statements?

If your company’s gross revenue for any given financial year does not exceed HK$ 2,000,000, then you are not required to file its audited accounts with the Inland Revenue Department.

Many companies therefore wrongly believe that audited accounts are not necessary, which is a mistake.

The preparation of audited accounts is mandatory even if your company’s gross income is below HK$ 2,000,000 and the authorities may ask you to present such accounts at any time.

The preparation of annual audited accounts is however not required in the following circumstances:

• Dormant company: a company is exempted from the obligation to prepare annual audited accounts when (i) it has no accounting transaction for a relevant financial year, and (ii) has declared its dormant status to the Hong Kong Companies Registry
• Hong Kong branch: the Hong Kong branch of a foreign company is not required to prepare an annual audited account if it provides the following information to the Inland Revenue Department:

• • the place of incorporation of the foreign company
  • confirmation as to whether the country of incorporation requires the preparation of audited accounts including information about overseas subsidiaries and branches and whether such audited accounts were duly prepared
  • a brief recap of Hong Kong’s branch accounting records
  • a certified true copy of such accounting records

When should profits tax and provisional profits tax be paid?

Profits tax shall be paid as notified by Inland Revenue Department, generally between November of the year in which your company’s Profits Tax Return is received and April of the following year.

As profits tax is paid after the end of the relevant financial year, your company is required to pay in advance each year an estimated tax (known as provisional profits tax) based on its profit for the previous financial year.

The provisional profits tax is payable in two installments, of respectively seventy-five percent (75%) of the requested amount, and twenty-five percent (25%) three months later.

If the provisional profits tax paid by your company is higher or lower than the actual profits tax due for the relevant financial year, a subsequent adjustment will take place.

Can losses of previous years be carried forward?

Losses suffered by your company during a financial year can be carried forward and offset against future profits.

However, losses cannot be carried backward and be used to reduce past profits.

Profits tax in Hong Kong is assessed and paid at the company level, with no possible transfer or pooling of losses between companies of the same group.

How can I avoid double taxation between Hong Kong and my country of residence?

Hong Kong has a territorial tax system and only taxes profits generated in Hong Kong.

This means your company will not be taxed in Hong Kong for profits derived from business outside of Hong Kong.

Besides, Hong Kong has signed double-tax treaties with many jurisdictions to reduce or eliminate the risks of double taxation.

What are the consequences of not filing your Profit Tax Return (BIR51)?

Failure or delay in filing profit tax returns may lead to progressive penalties and even criminal prosecution.

It may also lead to additional higher taxes as your company will then be unable to enjoy the carious deductions and incentives normally available.

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The role of the Directors in Hong Kong is to determine the strategy and supervise the operations of the company.

The initial Directors of your company are normally appointed at the time of incorporation.

However, you may sometimes need to appoint a new director for your Hong Kong company later on.

This may be the case because you want to increase the size of the board of directors, or because an existing director has resigned.

The appointment of a new Director of a Hong Kong company is fairly simple.

Who can be appointed as the Director of your HK company?

Every limited liability company in Hong Kong must have at least 1 Director who is a human being (as opposed to a company).

The other directors (if any) may include individuals or companies.

You should keep in mind that:

• There are no restrictions on the nationality of Directors
• The Directors do not need to reside or be incorporated in Hong Kong
• A Director must be of full age and capacity (minimum 18-year-old)

Read more on third-party directors in Hong Kong

Who has the power to appoint the Director of a HK company?

The shareholders of a Hong Kong company have the power to appoint the Directors. The shareholders also decide on the number of Directors.

If your company has more than one shareholder, the detailed rules for the appointment of Directors will usually be detailed in the Articles of Association and the Shareholders Agreement (if any).

The Board of Directors may also appoint new Directors, usually to fill a vacancy.

What documents are required for the appointment of a director in Hong Kong?

The main documents required for the appointment of a new director are as follows:

• Resolution of the shareholders or directors as applicable
• Form ND2A (see specimen)

These documents will include various information about the newly appointed Director, including:

• The date when the appointment shall become effective
• The identity of the new Director
• The residential address or incorporation address of the new Director

What is the process for appointing the new Director of a HK company?

The process for appointing the director of an HK company is fairly simple:

• Step 1: Preparation: Your company secretary prepares the director appointment documents
• Step 2: Signature: The documents are signed by the newly appointed Director and the company
• Step 3: Filing: The signed documents are filed with the Companies Registry in Hong Kong
• Step 4: Register of directors: The details of the new director are entered in the Company’s Register of Directors. All relevant documents are archived in your company’s statutory records.

It is absolutely crucial to closely follow all procedures and keep all records, especially if you intend to sell your business in the future.

It is also important to provide the newly appointed Director with a copy of the Companies  Registry “Guide to Directors’ Duties”.

How long does it take to appoint a new Director?

The appointment of a new director only takes a few days provided that your company’s past records are in order.

The filing process with the HK Companies Registry normally takes around 2 days.

Should I inform my bank about the new Director appointment?

While not a legal requirement, we strongly advise you to inform your bank upon any appointment of a new director for your Hong Kong company.

This will allow your bank to proactively update your company’s KYC.

Not informing your bank and waiting until it finds out by itself is a bad idea.

It may sometimes result in your account being temporarily frozen.

Ready to take your business into HK? Air Corporate will help you appoint your directors legally and efficiently.

Focus on your business, we take care of the rest.

FAQs

1. Can a director of a Hong Kong company be removed from their position?

Yes, a director of a Hong Kong company can be removed from their position by the shareholders or by the board of directors.

The exact process for removal will depend on the company’s Articles of Association and Shareholders Agreement (if any). It is important to follow the proper procedures and obtain legal advice prior to the removal based on Hong Kong’s law.

2. Is it possible for a non-resident to be appointed as a company director in Hong Kong?

Yes, as there are no residency requirements for directors of Hong Kong companies, a non-resident of Hong Kong can be appointed as a director.

However, there can be certain requirements, which are important to note as directors according to Hong Kong address for the service of notices and documents.

3. What is the role of the company secretary in the appointment of directors in Hong Kong?

The company secretary is responsible for preparing the necessary documents for the appointment of a new director in Hong Kong.

This includes drafting the resolution of the shareholders or directors, as well as completing Form ND2A. The company secretary may also provide guidance on the legal requirements and procedures for the appointment of directors.

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