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Advance Ruling Case No. 7


1. The provisions of the Ordinance

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

 

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2. Background

(a) X Ltd. was incorporated in Hong Kong in 1982. It is a registered securities dealer in Hong Kong and its principal activity is securities brokering. It currently holds three trading rights of the Stock Exchange of Hong Kong Ltd. ["the Exchange"].
(b) Y Ltd. was incorporated in Hong Kong on 28 February 1989 and it is an associated company of X Ltd. It is a registered dealer under the Securities Ordinance. It currently holds 5 trading rights of the Exchange. Its principal activities are the provision of brokerage services, underwriting services and securities margin trading to retail clients.

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3. The arrangement 

(a) X Ltd. will transfer all of its trading rights of the Exchange to Y Ltd. by January 2002 at arm's length value after which X Ltd. will act as an introductory broker subcontracting all orders to Y Ltd. for execution.
(b) X Ltd. will continue to serve only its two existing customers and will pass part of the commissions received from these customers to Y Ltd. Which will in turn make a rebate payment to X Ltd. not exceeding the amount of commissions so received.
(c) Y Ltd. will provide back-office services to X Ltd. in return for a service fee.

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4. The ruling

(a) The proposed transfer of the trading rights of the Exchange to Y Ltd. is not one which would fall within the terms of section 61A of the IRO.
(b) The tax loss of X Ltd. is and continues to be available for setoff against future profits of the company, if any, under section 19C(4) of the IRO.

 

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5. The period for which the ruling applies

  This ruling will apply in the year of assessment 2001/02 and 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 principal activity of X Ltd. will remain securities brokering.
(b) Y Ltd. will not shift any of its income or profits, or any income or profits that would otherwise be accrued to it, to X Ltd.
(c) Y Ltd. will finance the acquisition of the trading rights of the Exchange by means of its existing shareholders' equity. As Y Ltd. will not incur any interest expenses or expenses of a similar nature as a result of the acquisition, no deduction will be claimed for any such expense.
(d) The fees charged by Y Ltd. in return for the back-office services provided to X Ltd. will be determined on an arm's length basis.

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7 . Date of ruling issued 

  7 December 2001.