A financial year is any annual period at the end of which a company’s accounts are closed. A financial year end date signifies the completion of that 12 month accounting period for a company and is used for accounting purposes to help prepare a company’s annual financial statements. The accounting and bookkeeping records kept for a company will be maintained in relation to a company’s financial year end date.
A Hong Kong company’s fiscal year commences on the date of their incorporation and ends on a date set by the company’s directors (which should be decided by the date of incorporation).
Companies in Hong Kong have the ability to decide upon their financial year end date, with most companies in Hong Kong choosing to fix its financial year end date on either 31 December or 31 March, to align with the Hong Kong Government’s financial year.
There are times when recently incorporated companies under the new Companies Ordinance fail to select a fiscal year end date. In these situations, if no date is specified by the company directors, the financial year end date will be the last day of the month of the first anniversary of the company’s incorporation.
When determining the financial year end for a Hong Kong company, there are two factors to consider – the accounting and tax considerations.
From an accounting consideration, it makes sense to determine whether a certain financial year end date will simplify or complicate a company’s accounting process. For example, it is common to align the financial year end date with that of related companies for consolidation purposes, especially if the Hong Kong company is a subsidiary of a larger, foreign group company. Doing so will simplify the accounting process for both companies by minimizing the accounting treatments that must be done when consolidating the group’s financial statements.
From a tax consideration, one should consider the implications associated with the company’s Hong Kong tax obligations – this is because a Hong Kong company’s financial year end date will help determine their annual profits tax return deadline.
In Hong Kong, there are 2 common financial year end dates, March 31st and December 31st. Hong Kong companies may also pick a financial year end date for any day between 1 April to 30 November. Companies should consider whether their annual profits tax return deadline will coincide with the peak season of their company and whether there are potential cash flow issues in those months.
Furthermore, companies should always choose the end of a month as their fiscal year end date. As financial statements are based on calendar months, choosing a financial year end in the middle of a month can create complications for accounting purposes. To the extent a company engages a tax representative, they may have their profits tax return deadline extended as follows:
The Hong Kong Companies Ordinances and the Hong Kong Accounting Standards allow for the change of a Hong Kong company’s financial year end date. The most common reason for a Hong Kong company changing that date is when they become a member company of a group.
There are certain limitations which impact a company’s ability to change its financial year end date. Typically a Hong Kong company may change it if:
If a Hong Kong company has previously changed its financial year end date, then they may only adopt a new one under certain conditions.
Once a Hong Kong company has changed its financial year end date, they should also be conscious of any accounting adjustments they must make for their financial statements. This is because a change in the financial year end date may have implications towards the company’s profits tax obligations and may result in a recomputation of the company’s current tax liabilities. The IRD may provide guidance on these situations via advance rulings.
The FastLane Group has extensive experience helping entrepreneurs from around the world in their company formation process in Hong Kong. We have assisted them from the beginning of this process to the end, including helping advise on how to choose financial year end date that is best suited to them. Please contact the FastLane Group for help!
This blog originated from: https://fastlanepro.hk/choose-financial-year-end/