What if your Hong Kong business faced a surprise tax audit tomorrow? Would your documentation withstand IRD scrutiny? In Hong Kong’s territorial tax system, proper record keeping isn’t just about compliance—it’s your first line of defense against costly penalties, disallowed deductions, and rejected offshore claims. With the IRD intensifying audits and implementing new regulations in 2024-2025, audit-proof documentation has never been more critical for business success.

The Legal Framework: What Hong Kong Law Requires

Hong Kong’s record keeping obligations rest on two pillars of legislation that every business must understand. The Inland Revenue Ordinance (Cap. 112), particularly Section 51C, forms the backbone of tax compliance requirements, while the Companies Ordinance (Cap. 622) governs corporate governance documentation.

Inland Revenue Ordinance (Section 51C)

This critical section 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. The records must be retained for at least 7 years from the transaction completion date.

Companies Ordinance (Cap. 622)

This ordinance sets out corporate governance and company administration requirements, including maintaining registers of members and directors, meeting minutes, and other essential corporate documents.

Mandatory Record Retention Periods

Understanding retention requirements is crucial for compliance and audit preparedness. Different documents have different retention periods, but the 7-year rule applies to most tax-related records.

Essential Business Records You Must Keep

Comprehensive documentation is your best defense during IRD audits. Here’s what you need to maintain across different business functions:

Financial Records (Core Requirements)

• 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

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

Transfer Pricing Documentation: Who Needs It?

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. With the IRD intensifying enforcement in 2024-2025, understanding these requirements is crucial.

Size Test Exemption

A Hong Kong entity is exempt from preparing master and local files 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:

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: The Digital Compliance Frontier

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

Substantiating Offshore Claims: Documentation is Everything

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. With the IRD intensifying scrutiny, proper documentation is your strongest defense.

Essential Documentation for Offshore Claims

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

Penalties for Non-Compliance: The Cost of Poor Documentation

Understanding the consequences of inadequate record keeping is essential for risk management. The penalties can be severe and extend beyond monetary fines.

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

2025 Regulatory Updates: What’s Changed

Companies (Amendment) Ordinance 2025

Enacted on 8 January 2025 and effective from 17 April 2025, this amendment introduces significant changes to corporate communications:

• 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

7 Best Practices for Audit-Ready Documentation

1. Implement a Document Management System: Centralize all business records in a secure, accessible system with consistent naming conventions, version control, and regular backups.
2. Maintain Contemporaneous Records: Create documentation at the time of transactions or decisions—avoid retrospective record creation that undermines credibility.
3. Segregate Income and Expenses: Clearly distinguish between Hong Kong and offshore operations with documented cost allocation bases.
4. Conduct Regular Compliance Reviews: Annual reviews of record keeping practices, periodic transfer pricing updates, and staff training on requirements.
5. Prepare for IRD Inquiries: Maintain a comprehensive IRD inquiry response kit with key documents readily accessible.
6. Leverage Technology: Use accounting software with built-in compliance features, automated backup systems, and digital signatures for authenticity.
7. Document Business Decisions: Record comprehensive board meeting minutes, document rationale for significant decisions, and retain correspondence related to major transactions.

In Hong Kong’s evolving tax landscape, robust documentation isn’t just about compliance—it’s about business resilience. The difference between a smooth audit and a costly penalty often comes down to the quality of your records. By implementing systematic documentation practices today, you’re not just preparing for potential IRD scrutiny; you’re building a foundation for sustainable business growth, better decision-making, and enhanced operational transparency. Remember: when it comes to tax compliance, the best defense is a well-documented offense.