Many charities or non-profit organisations (communities or clubs) choose to incorporate as a Hong Kong limited company. A corporate structure enables them to employ staff, enter into contracts, manage investments and/or own property and other assets, while limited liability also helps to protect the people running them from being personally liable for the debts and legal responsibilities.
Charities and communities or clubs prefer to choose the option of a Limited by Guarantee company formation in order to protect members/subscribers from the company’s debts. Other reasons to opt for a Limited by Guarantee company in Hong Kong include:
Companies limited by shares and companies limited by guarantee both provide limited liability for their members, but companies limited by guarantee offer two further distinct advantages:
• They do not involve share capital and have no shareholders, so the controlling members of the company cannot share the profits of the company, which must be retained within the company.
• The liability of the members is limited to the amount that they respectively undertake to ‘guarantee’ to the assets of the company, which would typically be a nominal amount such as HK$10
A company limited by guarantee is regulated by the Hong Kong Companies Registry but the laws on charities in Hong Kong remain uncodified and there is no centralised body regulating charities. Instead different aspect of a charity’s operations are subject to regulations and oversight of different government departments, while the Inland Revenue Department (IRD) holds the power to grant tax exemption status (commonly referred to as “s.88 tax exempted charity” after Section 88 of the Inland Revenue Ordinance (IRO)) to “any charitable institution or trust of a public character”.
The IRD issues guidelines on how organisations can obtain such tax exemption status and also on whether donations qualify as approved charitable donations and in a form that allows an individual or corporate donor to enjoy deduction from their salaries / profits tax for that year of assessment.
To be a charity at law, the institution or trust must be established for purposes which are exclusively charitable and case law sets out four principal charitable purposes:
- The relief of poverty;
- The advancement of education;
- The advancement of religion;
- Other purposes of a charitable nature beneficial to the community of Hong Kong not falling under any of the preceding heads.
The first three may apply in relation to activities carried on in any part of the world and must also be for the public benefit, which means they cannot be established for the benefit of specific individuals. Purposes held not to be charitable by the courts include: attainment of a political object, promotion of the benefits of the founders or subscribers, encouragement of a particular sport, provision of scholarship fund for employees of a particular company.
Setting up a charity as a guarantee company
To incorporate a company limited by guarantee, the draft incorporation statutory returns and articles of association, together with the appropriate incorporation and business registration fees, have to be physically submitted to the Companies Registry for review.
An entity wishing to apply for s.88 tax exempted charity status is further required to submit an application to the IRD, prior to or immediately after the entity has been incorporated. The application should include the certificate of registration, articles of association, list of directors, any available financial statements and a list of the activities planned.
The IRD will review the entity’s articles of association to ensure that they:
- Set out the entity’s objectives precisely and clearly;
- Limit the application of the entity’s funds towards the attainment of its stated objectives;
- Prohibit distribution of the entity’s income and properties amongst its members;
- Prohibit members of the entity’s governing body from receiving remuneration;
- Specify how any remaining assets should be transferred upon dissolution (typically donation to other charities);
- Avoid any conflict of interests;
- Require the keeping of sufficient records of income and expenditure (including donation receipts), proper accounting books and compilation of annual financial statements.
If the IRD does not approve the proposed articles of association, the entity is required to amend the articles by members’ resolutions before resubmission. As a result, some applicants prefer to obtain IRD approval before formally incorporating the entity.
When all conditions are fulfilled, the IRD will issue a written confirmation and list the entity’s name in the register of charitable institutions and trusts of a public character recognised as exempt from tax, which is publicly accessible on the IRD’s website. The whole process could take up to six months.
Tax benefits from charitable status
The tax benefits granted to a recognised charity include both exemption from paying profits tax on all income to be applied for charitable purposes and exemption from stamp duty on the transfer of any immovable property or Hong Kong stock that is gifted to the charity.
Donors are also granted a tax deduction on salary or profits. It is therefore essential that a charity does not start receiving donations before s88 tax exemption status has been granted.
Hong Kong charities are able to support and offer tax deductible donations on charitable causes locally or internationally unless the charity is approved specifically as one whose charitable purposes are for the benefit of the Hong Kong community.
A company that has been recognised as a charity is not required to pay the business registration fee or file a profits tax return, although the IRD may conduct a periodic review of its charitable status.
The general compliance and annual filing requirements for companies limited by guarantee are to:
- Maintain a local registered address
- Appoint a resident company secretary (individual or body corporate)
- Appoint at least one director who is a natural person (over 18 years old)
- Have at least one shareholder (individual or body corporate)
- Notify the Companies Registry of any changes to its particulars
- Renew its annual business registration
- Maintain proper accounting records and prepare annual financial statements
- Appoint a practising accountant to audit the annual financial statements
- Hold an annual general meeting at which the company’s financial accounts are adopted
- File annual returns with the Companies Registry and submit a profits tax return together the annual audited accounts to the IRD.
- Maintain at least two directors (all of its directors must be natural persons)
- Submit an annual return to the CR together with certified true copies of the relevant financial statements, directors’ report and auditor’s report within 42 days after the annual return date, which is nine months after the end of the company’s accounting reference period.
Advantages of a company limited by guarantee
The internal operation of a company limited by guarantee is governed by its Articles of Association and the Companies Ordinance such that the rules are clear and the members are well informed of how the company will operate.
The accounts of the company will be well managed because an audited account must be filed annually with the Companies Registry. Audited accounts must also be tendered at the annual general meeting so that members of the company are well informed of the financial position of the company.