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Advance Ruling Case No. 1

1. The provisions of the Ordinance

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


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2. Background

(a) X Ltd. was incorporated in Hong Kong on 30 July 1996. Its issued and paid up capital consisted of two shares of $1 each. One share was issued to Mr A. The other one share was issued to Mr B.
(b) X Ltd. operated a Chinese restaurant business. It commenced business on 11 May 1997 and ceased operation on 9 March 1998.
(c) The audited accounts of X Ltd. covering the period from 30 July 1996 to 30 June 1998 showed accumulated loss of $7 million odds.
(d) As at 30 June 1998 Mr A and Mr B had advanced directors' loans of $6,500,000 odds and $600,000 odds to X Ltd. respectively.


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3. The arrangement

(a) The one share held by Mr B in X Ltd. is proposed to be transferred to the other shareholder Mr A. In addition, the director's loan from Mr B in the amount of $600,000 odds would also be transferred to Mr A for a nominal consideration of $1.
(b) X Ltd. proposed to operate a completely new restaurant/karaoke business after the change of shareholding.
(c) X Ltd. would continue to be managed by Mr A after the change of shareholding. Mr B would continue to be a director of X Ltd.


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4. The ruling

(a) The tax loss is and continues to be available to set off against future profits, if any, of X Ltd. under section 19C of the IRO.
(b) Section 61B of the IRO is considered not applicable.

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5. The period for which the ruling applies

  This ruling applies for the year of assessment 2000/2001 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

  This ruling is based on the assumption that the tax loss incurred in the year of assessment 1997/98 is ascertained and available for carry forward.


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7. Date of ruling issued

  17 May 2000.