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Advance Ruling Case No. 56


1. The provisions of the Ordinance

  This ruling applies in respect of sections 14, 33A, 35, 39B, 39D, 51, 61 and 61A of the Inland Revenue Ordinance (“IRO”).

 

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2. Background

(a)
Four companies, namely Company S1, Company S2, Company S3 and Company S4 (collectively referred to as “the HK Companies”), were incorporated in Hong Kong.  They are wholly owned by Company H1, Company H2, Company H3 and Company H4 respectively (collectively referred to as “the Holding Companies”), all of which are held by a single ultimate holding company.  All the four Holding Companies and the ultimate holding company were incorporated in Country X.
(b)
The HK Companies collectively own a building and run a business engaging the whole building.

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3. The arrangement 

(a) The Group plans to carry out a restructuring exercise with an aim to simplify the holding structure of the business in order to enhance operational efficiency and governance effectiveness.
(b) The restructuring plan will be implemented during the year ended 31 December 2015 and involves two steps as follows:
 
(i) In step 1, the four Holding Companies will be merged into one single entity.  After the merger, Company H1 will be the only holding company of the HK Companies.
 
(ii) In step 2, Companies S2 to S4 will be amalgamated into Company S1 which will act as the amalgamated company (“the Amalgamation”).  The Amalgamation will be carried out in accordance with Division 3 of Part 13 of the Companies Ordinance (Cap. 622) (“the CO”).
(c) After the Amalgamation, Company S1 will continue to own the business and be principally and solely engaged in the operation of the business.
(d) Pursuant to the CO, the legal effect of the Amalgamation is that on and after the effective date of the Amalgamation:
 
(i) Companies S2 to S4 cease to exist as an entity separate from Company S1; and
 
(ii) Company S1 succeeds to all property, rights and privileges, and all liabilities and obligations of Companies S2 to S4.

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4. The ruling 

(a) Company S1’s succession of any asset, property or liabilities of Companies S2 to S4 will not constitute a sale, transfer or other disposal of or a change in the nature of that asset, property or liabilities for the purposes of the IRO.  Provisions or accruals of Companies S2 to S4 carried over to Company S1 will be accepted as having no change in tax treatments.
(b) No profits or loss will be regarded as having been derived by the HK Companies in respect of the succession as a result of the Amalgamation.
(c) For the purpose of section 33A of the IRO, Company S1 is regarded as being entitled to the relevant interest in all commercial buildings and structures of Companies S2 to S4 and annual allowances will be available to Company S1.  Section 35 of the IRO will not be applicable.
(d) For the purpose of section 39B of the IRO, the unallowed reducing value of the relevant machinery or plant of Companies S2 to S4 will be used for computing the annual allowances made to Company S1.  Section 39D(2) of the IRO will not be applicable.
(e) Companies S2 to S4 will not be granted any annual allowances in respect of the commercial buildings and structures in (c) above and the machinery or plant in (d) above for the year of assessment in which the amalgamation occurs.
(f) For the purpose of section 51(1) of the IRO, Company S1, as the amalgamated company, will furnish for the year of assessment in which the Amalgamation occurs:
 
(i) its own Profits Tax return which will include the assessable profits or adjusted losses of Companies S2 to S4 for the period from the effective date of the Amalgamation to the end date of the basis period; and
 
(ii) respective Profits Tax returns of Companies S2 to S4 to report their assessable profits or adjusted losses for the period from the following day of the end date of the last basis period to the day immediately before the effective date of the Amalgamation.
(g) Companies S2 to S4 will not be required to notify the Commissioner of their cessation of carrying on a trade, profession or business under 51(6) of the IRO.
(h) Sections 61 and 61A of the IRO will not be applied to the Amalgamation.

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5. The period for which the ruling applies

  This ruling applies for the year of assessment 2015/16 and all subsequent years of assessment.

 

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

(a)
The HK Companies, held by a company neither formed nor registered in Hong Kong, can be amalgamated in accordance with the provisions in Division 3 of Part 13 of the CO.
(b)
Company S1 will succeed to the trades or businesses of Companies S2 to S4 on the effective date of the Amalgamation and continue to carry on the trades or businesses.
(c)
Companies S2 to S4 will not have any tax losses for set off against the assessable profits of Company S1 upon and after the Amalgamation.

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7 . Date of ruling issued 

  10 July 2015

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8. Commentary 

 

In the commercial world, it is not uncommon for two or more companies to amalgamate into one company through business restructuring.  In general, the main reason for amalgamation is to maximize profits through synergy of cost saving, operational efficiency, market diversification or reduction in competitors, etc. 

In the present case, the HK Companies collectively run a business and there is genuine need for an amalgamation to achieve operational efficiency.

(This commentary is not a legally binding statement and it does not form part of the Ruling.  For assessment practice, please click here.)