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Advance Ruling Case No. 59


1. The provisions of the Ordinance

  This ruling applies in respect of sections 14, 19C(4), 51(1), 61, 61A and 61B of the Inland Revenue Ordinance (“IRO”).

 

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2. Background

(a)
Company A and Company B are companies incorporated in Hong Kong and are under the same group. Company B had been a wholly owned subsidiary of Company A shortly after its incorporation. In 2016, Company B was amalgamated into Company A (“the Amalgamation”).
(b)
Company A is and Company B (prior to the Amalgamation) was licensed to carry out certain regulated activities in securities broking and the provision of various financial services. The daily business operation of Company B was supported by the same group of personnel and resources as Company A. Management fees were charged by Company A based on computed cost.
(c)
Both Company A and Company B closed the accounts at the year ended December 31. As at 31 December 2015, the amount of net assets of Company A was a few times greater than that of Company B. Company A sustained significant amount of tax losses while the unutilized tax losses of Company B before the Amalgamation, if any, is relatively insignificant.

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3. The arrangement 

(a) The Amalgamation took place in 2016 pursuant to Division 3 of Part 13 of the Companies Ordinance, Cap.622.
(b) The legal effect of the Amalgamation is that on and after the effective date of the Amalgamation:
 
(i) Company B ceases to exist as an entity separate from Company A, the surviving (amalgamated) company;
 
(ii) shares of Company B have been cancelled without payment/ consideration; and
 
(iii) Company A has succeeded to all the property, rights and privileges, and all the liabilities and obligations of Company B without any sale of assets/ liabilities.

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4. The ruling 

(a)
Upon the Amalgamation, Company A succeeded to all the assets, property or liabilities of Company B.  Such succession shall not constitute a sale, transfer or other disposal of or a change in the nature of those assets, property or liabilities for the purpose of the IRO.  For the purpose of section 14 of the IRO, no profit or loss shall arise or be deemed to arise in Company A and Company B as a result of the Amalgamation.
(b)
For the purpose of section 19C(4) of the IRO, any unutilized tax losses sustained by Company B prior to the Amalgamation will be available for set off against the assessable profits of Company A derived on or after the Amalgamation from the same trade or business carried on by Company B up to the day immediately before the Amalgamation and succeeded by Company A.
(c)
For the purpose of section 19C(4) of the IRO, any unutilized tax losses sustained by Company A prior to the Amalgamation will be carried forward and will be available for set off against the assessable profits derived on or after the Amalgamation, after setting off the tax losses of Company B as mentioned in sub-paragraph (b) above.
(d)
For the purpose of section 51(1) of the IRO, Company A, as the amalgamated company, shall furnish:
 
(i) Profits Tax return for the year of assessment 2016/17 for Company B to report Company B’s assessable profits or adjusted loss for the period from 1 January 2016 to the day immediately before the Amalgamation; and
 
(ii) its own Profits Tax return for the year of assessment 2016/17 to report its assessable profits or adjusted loss, including the assessable profits or adjusted loss of the trade or business succeeded from Company B for the period from the effective date of the Amalgamation to 31 December 2016.
(e)
Sections 61, 61A and 61B of the IRO shall have no application to the items identified in the ruling application.

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5. The period for which the ruling applies

  This ruling applies for the year of assessment 2016/17 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)
Company A continued to carry on its trade or business until the Amalgamation and will continue to do so after the Amalgamation.
(b)
The trade or business carried on by Company B immediately before the Amalgamation has been succeeded and will be carried on by Company A upon and after the Amalgamation.
(c)
There will be no significant decrease in the net assets position of Company A, as compared with its net assets position as at 31 December 2015, during the period from 1 January 2016 to the effective date of the Amalgamation.
(d)
Company A has adequate financial resources (excluding intra-group loans) to fund the purchase of the trade or business of Company B if such purchase had been achieved by way of purchase on arm’s length terms and not by way of amalgamation.

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7 . Date of ruling issued 

  24 October 2016

 

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8. Commentary 

 

In the present case, Company A and Company B were operating their trade or business in the financial industry prior to the Amalgamation. Both companies sustained tax losses. It must be emphasized that the tax losses in Company A can be used to set off against the profits derived from the trade or business succeeded from Company B only if Company A meets the adequate financial resources requirement, i.e. having adequate financial resources to acquire the trade or business of Company B if not through amalgamation. It is also noteworthy that any pre-amalgamated tax losses of Company B can only be transferred to Company A and be allowed for set off against future profits of Company A subject to the same trade requirement, i.e. which profits are derived from the same trade or business.

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