Understanding Hong Kong’s Record Keeping Requirements

Audit-proofing your Hong Kong business requires meticulous attention to documentation standards set by the Inland Revenue Department (IRD). The territorial tax system and increasingly stringent compliance requirements make proper record keeping not just a legal obligation but a strategic necessity for businesses operating in Hong Kong.

Legal Framework

Hong Kong’s record keeping obligations are primarily governed by two pieces of legislation:

• Inland Revenue Ordinance (Cap. 112), Section 51C: Requires every person carrying on a trade, profession, or business in Hong Kong to keep sufficient records in English or Chinese to enable assessable profits to be readily ascertained
• Companies Ordinance (Cap. 622): Sets out corporate governance and company administration record requirements

The Electronic Transactions Ordinance (Cap. 553) provides the legal framework for electronic records, ensuring they have the same validity as paper documents when properly maintained.

Mandatory Record Retention Periods

Understanding retention requirements is crucial for compliance and audit preparedness:

Document Type	Retention Period	Legal Basis
Business accounting records	Minimum 7 years	IRO Section 51C
Tax returns and supporting documents	Minimum 7 years	IRO Section 51C
Employee payroll and MPF records	Minimum 7 years	Employment Ordinance
Transfer pricing documentation	Minimum 7 years	IRO Schedule 17I
Corporate governance documents	Indefinite (company lifetime)	Companies Ordinance
Offshore claim substantiation	Minimum 7 years	IRO Section 51C

Important note: The 7-year retention period begins from the completion date of the transaction, not the accounting period end. These obligations persist even after ceasing business until the seven-year period elapses.

Essential Business Records Required

Financial Records

The IRD requires comprehensive financial documentation including:

• Books of account: Recording receipts and payments, or income and expenditure
• Daily transaction records: Every amount of money received or paid
• Income statements: Showing how much money your business earned and spent
• Cash flow statements: Tracking all money coming in and going out
• Balance sheets: Assets and liabilities your business owns or owes
• Bank statements: Complete records from all business accounts
• Vouchers, receipts, and invoices: Underlying documentation to verify all book entries

Goods and Inventory Records

For businesses that buy or sell goods, additional records are mandatory:

• Product details: what was bought or sold, quantities, buyer and seller information, and prices
• Stock records: inventory checks and final stock reports at financial year-end
• Purchase orders and delivery notes
• Goods received notes
• Inventory valuation methods and calculations

Service Business Records

Service providers must maintain:

• Details of services provided
• Service agreements and contracts
• Time sheets and service delivery records
• Client correspondence

Employee and Payroll Records

Required under the Employment Ordinance, these records must be kept for at least seven years:

• Employment contracts: Agreements showing job duties, salary, and terms of work
• Payroll records: Breakdown of wages, bonuses, deductions, and MPF contributions
• Leave records: Information on vacation, sick leave, and other time off
• IR56 forms and other tax-related employee documentation
• Performance reviews and disciplinary records

Corporate Governance Documents

Essential corporate records include:

• Meeting minutes: Notes from board or shareholder meetings, including important decisions made
• Board resolutions: Written decisions on major matters like hiring directors or approving investments
• Shareholder agreements: Contracts between shareholders explaining their rights and responsibilities
• Register of members and directors
• Share certificates and transfer documents

Transfer Pricing Documentation Requirements

Hong Kong’s transfer pricing regime, effective for accounting periods beginning on or after 1 April 2018, follows the OECD’s three-tiered approach requiring master files, local files, and country-by-country reports.

Who Must Prepare Transfer Pricing Documentation

A Hong Kong entity engaging in transactions with associated entities must prepare transfer pricing documentation, subject to exemptions based on size and transaction thresholds.

Size Test Exemption

A Hong Kong entity is exempt if it satisfies any two of the following conditions:

• Total revenue does not exceed HK$400 million
• Total assets do not exceed HK$300 million
• Average number of employees does not exceed 100

Transaction Threshold Exemptions

If total controlled transactions do not exceed these thresholds, local file documentation is not required for that transaction type:

Transaction Type	Annual Threshold
Transfer of goods	HK$220 million
Provision of services	HK$110 million
Transfer or use of intangibles	HK$110 million

Master File Requirements

The master file contains high-level information on the group’s global business operations and transfer pricing policies, including:

• Organizational structure of the multinational group
• Description of the group’s business operations
• Group’s intangibles and intercompany financial activities
• Group’s financial and tax positions

Local File Requirements

The local file sets out economic characteristics of related party transactions, amounts involved, and transfer pricing analysis demonstrating arm’s length pricing, including:

• Description of the Hong Kong entity and its business
• Controlled transactions and amounts
• Comparability and functional analysis
• Selection and application of transfer pricing method
• Financial information used in the analysis

Preparation and Submission Deadlines

• Preparation deadline: Within 9 months after the accounting period end
• Form IR1475 submission: Within 1 month of IRD request
• Language: English or Chinese
• Retention period: Minimum 7 years after the accounting period end

Electronic Records and Digital Documentation

Legal Acceptance of Electronic Records

Electronic recordkeeping is fully compliant with IRD guidelines. Under the Electronic Transactions Ordinance (Cap. 553), electronic records are legally valid and acceptable for audit purposes when they meet specific criteria.

Requirements for Electronic Records

To ensure compliance, electronic records must be:

• Readable: Stored in accessible, stable formats (e.g., PDF, XML)
• Retrievable: Easily accessible when required during audits or inspections
• Complete: Containing all required information for the retention period
• Secure: Protected from unauthorized access and corruption
• Authentic: Maintaining integrity and provenance

Technical Standards

The IRD specifies technical requirements for electronic records:

• Character encoding: English-only records must use ASCII, ISO/IEC 10646-1:2000, ISO/IEC 10646:2003 with Amendment 1, or ISO/IEC 10646:2011
• Format preservation: Documents should be retained in original electronic format or certified equivalent
• Metadata retention: Essential metadata must be preserved, including creator, sender, recipient, and timestamp information

Source Document Requirements

While electronic systems are acceptable, source documents substantiating income and expenditure must be retained. The IRD permits alternative storage methods for high-volume documents:

• Scanning documents and storing on CD-ROMs, DVD-ROMs, or USB drives
• Cloud-based storage systems with appropriate security and access controls
• Electronic document management systems

E-Invoicing

Electronic invoices are fully acceptable, provided they:

• Contain the same information as paper invoices
• Are retained for at least 7 years after transaction completion
• Remain accessible and readable throughout the retention period

Substantiating Offshore Claims

Hong Kong’s territorial tax system taxes only profits sourced from Hong Kong. Companies claiming offshore tax exemption must provide comprehensive documentation to substantiate that profit-generating activities occur outside Hong Kong.

IRD Scrutiny of Offshore Claims

The IRD has intensified scrutiny of offshore claims, requiring extensive documentation. The tax authority bases decisions on the substance of operations, not merely company registration or bank account location.

Essential Documentation for Offshore Claims

Corporate Structure Documents

• Company addresses in Hong Kong and abroad
• Organizational chart showing group structure
• Certificate of Incorporation and Articles of Association
• Details of directors and their locations

Financial Documentation

Financial statements should clearly segregate Hong Kong and offshore income and expenses:

• Separate profit and loss accounts for Hong Kong and offshore operations
• Clear allocation of shared costs between Hong Kong and offshore activities
• Explanatory notes on the basis of allocation for shared expenses
• Bank statements showing transaction flows

Operational Evidence

To demonstrate offshore status, companies must provide evidence that key profit-generating activities occur outside Hong Kong:

• Contracts: Negotiated and executed outside Hong Kong
• Board meetings: Minutes showing decisions made overseas
• Client solicitation: Evidence of marketing and client acquisition abroad
• Merchandise storage: Documentation of inventory locations
• Transaction booking: How and where transactions were recorded
• Correspondence: Communications with business parties demonstrating offshore activities

Visual Process Documentation

A flowchart of business operations can be extremely helpful in supporting offshore claims:

• Step-by-step breakdown of business processes
• Clear indication of where each step takes place (Hong Kong or overseas)
• Decision-making locations and authority levels

Application Timeline and Review

• Application timing: Should be filed with the first Profit Tax Return (PTR), due 18 months after incorporation
• IRD review period: Typically over 6 months
• Exemption validity: Usually 3-5 years once granted

If Your Claim Is Challenged

If the IRD rejects an offshore claim, the company has the right to:

• Lodge an appeal to the Commissioner of Inland Revenue
• Appeal to the Board of Review
• Seek judicial review through the Courts

Following rejection, the IRD may request additional documentation including contracts, invoices, bank statements, correspondence, and operational records showing where business activities were conducted.

Penalties for Non-Compliance

Understanding the consequences of inadequate record keeping is essential for risk management:

Violation	Maximum Penalty	Additional Consequences
Failure to maintain records (IRO Section 51C)	HK$100,000	Reassessment of tax liabilities
Failure to maintain records (Companies Ordinance)	HK$100,000 per violation	Director liability
Inability to produce documents during audit	N/A	Disallowance of deductions, higher tax assessments
Failure to submit Form IR1475	Penalties under IRO	Transfer pricing adjustments

Beyond monetary penalties, inadequate documentation can result in:

• Disallowed expense deductions
• Increased tax assessments
• Transfer pricing adjustments
• Rejection of offshore claims
• Reputational damage
• Difficulty in business transactions and due diligence

Best Practices for Audit-Ready Documentation

1. Implement a Document Management System

• Centralize all business records in a secure, accessible system
• Use consistent naming conventions and folder structures
• Implement version control and audit trails
• Ensure regular backups and disaster recovery procedures

2. Maintain Contemporaneous Records

• Create documentation at the time of transactions or decisions
• Avoid retrospective record creation
• Date and timestamp all important documents
• Retain email correspondence and meeting notes

3. Segregate Income and Expenses

• Clearly distinguish between Hong Kong and offshore operations
• Document the basis for cost allocations
• Maintain separate accounting records where appropriate
• Use consistent accounting policies

4. Conduct Regular Compliance Reviews

• Annual review of record keeping practices
• Periodic transfer pricing documentation updates
• Regular assessment of offshore claim substantiation
• Staff training on documentation requirements

5. Prepare for IRD Inquiries

• Maintain a comprehensive IRD inquiry response kit
• Keep key documents readily accessible
• Document unusual or complex transactions with additional detail
• Engage professional advisors for high-risk areas

6. Leverage Technology

• Use accounting software with built-in compliance features
• Implement automated backup systems
• Consider cloud-based solutions for accessibility and security
• Use digital signatures and timestamps for authenticity

7. Document Business Decisions

• Record board meeting minutes comprehensively
• Document the rationale for significant business decisions
• Retain correspondence related to major transactions
• Keep records of pricing decisions and transfer pricing policies

2025 Regulatory Updates

Companies (Amendment) Ordinance 2025

Enacted on 8 January 2025 and effective from 17 April 2025, this amendment introduces:

• Implied consent mechanism: Companies can disseminate corporate communications via website after a single notification to shareholders
• Due diligence implications: Critical documents may no longer be available in physical form
• Documentation strategy: Companies should ensure electronic records are properly maintained and accessible

Global Minimum Tax Implementation

The Inland Revenue (Amendment) (Minimum Tax for Multinational Enterprise Groups) Ordinance 2025, enacted on 6 June 2025:

• Applies OECD’s global minimum tax of 15% to MNE groups with annual consolidated revenue of EUR 750 million or above
• Updates Hong Kong’s transfer pricing rules to align with 2022 OECD transfer pricing guidelines
• Increases IRD scrutiny of transfer pricing arrangements

Enhanced Transfer Pricing Enforcement

The IRD is conducting more frequent and comprehensive transfer pricing audits:

• Increased requests for Form IR1475 submissions
• More detailed reviews of master and local files
• Greater scrutiny of intercompany transactions
• Focus on substance over form in related party dealings

Industry-Specific Considerations

Trading Companies

Additional documentation requirements include:

• Purchase and sales contracts with clear terms
• Shipping and logistics documentation
• Evidence of where negotiation and execution occurred
• Documentation of title transfer locations

Service Providers

Focus on:

• Service agreements detailing scope and deliverables
• Time sheets and service delivery evidence
• Location of service performance
• Client communication records

E-commerce Businesses

Particular attention to:

• Digital transaction records and payment gateway data
• Website analytics showing customer locations
• Server and infrastructure locations
• Digital marketing and customer acquisition documentation

Financial Services

Enhanced requirements for:

• Client onboarding and KYC documentation
• Transaction monitoring records
• Compliance with Securities and Futures Commission record keeping rules
• Risk management documentation

Common Documentation Pitfalls to Avoid

1. Incomplete Transaction Records

Ensure every transaction has supporting documentation including invoices, contracts, payment evidence, and delivery confirmation.

2. Inconsistent Accounting Treatment

Maintain consistent accounting policies and clearly document any changes in treatment or methodology.

3. Poor Separation of Personal and Business

Strictly segregate personal and business transactions, maintaining separate accounts and clear documentation.

4. Inadequate Offshore Substantiation

Don’t rely solely on contractual arrangements; document actual operational substance and decision-making locations.

5. Retroactive Documentation

Create records contemporaneously; the IRD can identify retrospectively created documentation, which undermines credibility.

6. Missing Transfer Pricing Benchmarking

Regularly update comparability analyses and ensure transfer pricing policies reflect current market conditions.

7. Inadequate Electronic Record Security

Implement robust security measures, regular backups, and disaster recovery procedures for electronic records.

8. Failure to Document Assumptions

Document the basis for estimates, allocations, and significant accounting judgments.