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Advance Ruling Case No. 52


1. The provisions of the Ordinance

  This ruling applies in respect of sections 19C, 61, 61A and 61B of the Inland Revenue Ordinance ("IRO").

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2. Background

(a) The applicant, Company A, was incorporated in Hong Kong. Its shares were held by Company H, Group P companies and Mr. Q (held on trust for Company H). Company H holds more than 50% of the total paid up share capital in Company A.
(b) Company H was incorporated in Country X.
(c) Company M was incorporated in Country X and is listed on the Stock Exchange of Country X. It operates in Hong Kong through a branch.
(d) Group P is the major shareholder of Company H and Company M.

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3. The arrangement

(a) Company H and Company M merged in early 2013. It is anticipated that the merger of these two companies will bring substantial economic benefit to both parties.
(b) The merger has been effected via a share swap and the surviving entity of the merger is Company M. Company M issued its common shares to shareholders of Company H.
(c) Group P remains as the major shareholder of the merged company.
(d) As a result of the merger, there has been a change in the shareholding in Company A. The shareholding of Company A held by Company H was transferred to Company M.
(e) Company A will continue to carry on its existing business and be managed by its existing local management team after the change of shareholding.

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4. The material assumptions in respect of a future event or any other matter made by the Commissioner

(a) The tax losses incurred by Company A prior to the year of assessment 2013/14 are ascertained and available for carry forward.
(b) No new business will be injected into Company A after the change of shareholding.

 

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5. The ruling

(a) The tax losses are and continue to be available to set off against the future profits, if any, of Company A under section 19C of the IRO.
(b) Sections 61, 61A and 61B of the IRO will not operate to deny the carry-forward of any agreed, or to be agreed, tax losses of Company A for setoff against its future assessable profits.

 

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6. The period for which the ruling applies

  This ruling will apply for the year of assessment 2013/14 and subsequent years of assessment until such time when the tax losses of Company A are fully utilized or there is a change in the shareholding of Company A that is not mentioned in this ruling.

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7. Date of ruling issued

  25 March 2013.

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8. Commentary

 

Under section 19C(4) of the IRO, a loss arising from a trade, profession or business shall be carried forward for set off against the corporation’s assessable profits for subsequent years until fully absorbed.
Section 61 of the IRO disregards artificial or fictitious transactions that reduce or would reduce the tax payable by a person whereas section 61A of the IRO counteracts transactions entered into for the sole or dominant purpose to obtain a tax benefit.

Section 61B of the IRO counteracts against tax avoidance by empowering the Commissioner to refuse to set off losses brought forward where he is satisfied that the sole or dominant purpose of a change in shareholding was the utilization of those losses to obtain a tax benefit.

In the present case, the change in shareholding in Company A was resulted from a merger of its immediate holding company with another company of the same major shareholder. After the change of shareholding, Company A will continue to carry on its existing business by its existing local management team and no new business will be injected thereto. The merger is not considered to be a tax avoidance transaction and sections 61, 61A and 61B do not apply.

(This commentary is not a legally binding statement and it does not form part of the Ruling.)