So you want to set up a charity in Hong Kong? There are various ways to go about it but a common way to do so is to set up a charity by setting up a company limited by guarantee. We’re going to be focusing on this type of structure in this article.
What is a charity in Hong Kong and what can it do?
First, it is essential to understand that “voluntary” or “non-profit” organizations, no matter how noble their cause may seem, are not necessarily considered charities. According to the law, a charity is an organization set up for one of the following purposes:
(a) Relief of poverty;
(b) Advancement of education;
(c) Advancement of religion; and
(d) Other purposes of a charitable nature beneficial to the community not falling under (a), (b) or (c).
Whereas the first three listed above can apply to activities carried on anywhere in the world, for purposes that fall under (d) these will only be considered as charitable if they are of benefit to the Hong Kong community.
Generally speaking a charity in Hong Kong can only carry out business if the funds raised out of such activity are reinvested into the charity. Similarly, a charity can also own property, but it should only be used for charitable purposes.
How do you set up a charity in Hong Kong?
Assuming you will proceed to set up a charity in Hong Kong by way of a company limited by guarantee, the next step is to consider the governing instrument. A charity must have a governing instrument that,
• Clearly indicates its objectives;
• Limits the use of funds it receives to be used for these objectives only;
• Prohibits distribution of its income and property to its members;
• Prohibits members of its governing body such as directors, trustees, etc. from receiving remuneration;
• Specifies how assets should be dealt with upon dissolution (usually donated to other charities); and
• Requires the keeping of sufficient and proper records operating records (e.g., donation receipts, proper accounting, etc.)
The governing instrument of a limited company is its articles of association. But the standard articles do not include the above, so you will first need to tailor your articles of association accordingly. You should obtain professional legal help to have your articles prepared correctly as this may affect whether or not the Inland Revenue Department (IRD) will approve your request for charitable status, more on that in the next section.
How to obtain charitable status, i.e., tax exemption?
A charity as described earlier in this article is entitled to tax exemption under Section 88 of the IRD. However, you must apply for approval to be tax exempt as a charity. You can apply for the exemption before or after setting up the company, but the ideal way to proceed is to apply beforehand.
With this aforesaid in mind, once you have tailored your articles of association, you must submit them for approval with the relevant application for tax exemption as a charity to the IRD. Obtaining professional help is once again a good idea, in fact, whoever assists you to tailor your articles of association should also be able to help you prepare and submit your application for tax exemption. Note it will typically take four months for the IRD to approve an application.
How to set up a company limited by guarantee for charitable purposes?
You’re almost done! If your tailored articles of association and application for tax exemption as a charity are approved, you can proceed to incorporate your company limited by guarantee. We have already covered the basic requirements for setting up and maintaining this type of company in our article Setting Up A Non Profit Organization in Hong Kong, the only difference is that you will be submitting your tailored articles of association with your application for incorporation as opposed to the standard. Subject to the Companies Registry asking for additional information; it usually takes around one month for a company limited by guarantee to be officially incorporated.
Why a company limited by guarantee?
A company limited by guarantee’s internal operations are governed by its articles of association and the Companies Ordinance. So, by using this structure to set up a charity, the rules are clear leaving no doubt for members as to how the company should be operated. Further, as companies must maintain annual audited accounts, the accounts of the company will be organized and well managed. Of course, you should consider that there will be some minimum costs, for a great overview of what to expect in terms of maintenance costs for limited companies check out our article Can You Afford To Incorporate And Maintain An HK Company? (note: your charity may be exempt from obtaining a Business Registration Certificate (unless a trade or business is carried on)).
Interested in setting up a company limited by guarantee for charitable purposes?