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Advance Ruling Case No. 47

1. The provisions of the Ordinance

  This ruling applies in respect of sections 14(1), 15(1)(c), 15(2), 61 and 61A of the Inland Revenue Ordinance ("IRO").

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2. Background

(a) The Company is a wholly owned subsidiary of Company A.
(b) The Company obtained funding, in the form of loans and advances, from Company A to finance its substantial investment in infrastructure. The loans and advances were interest-bearing during the initial period and have become interest-free after a few years.
(c) The Company has accumulated substantial losses and has been in a negative equity position since its set up. It is anticipated that it would take a long period of time for the Company to normalize its capital structure and restore to a positive equity position.

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3. The arrangement 

  Company A will waive a portion of the loans and advances due by the Company. The waiver is made for the purposes of improving the capital structure and the negative equity status of the Company and assisting the Company to restore to a healthier and balanced capital structure.

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

  There is no assumption made by the Commissioner.

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5. The ruling

(a) The Company will not be chargeable to Profits Tax under sections 14(1), 15(1)(c) or 15(2) of the IRO in respect of the waiver of the loans and advances by Company A.
(b) Sections 61 and 61A of the IRO will have no application to the transaction identified in the arrangement.

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6. The period for which the ruling applies

  The ruling will apply to the year of assessment 2011/12.

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7 . Date of ruling issued 

  16 September 2011.


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8. Commentary 


Under section 14(1) of the IRO, every person who carries on a trade, profession or business in Hong Kong is chargeable to Profits Tax on the profits from that trade, profession or business.

Section 15(1)(c) of the IRO deems sums received by a person by way of grant, subsidy or similar financial assistance in connection with the carrying on of a trade, profession or business in Hong Kong to be chargeable receipts.

Section 15(2) of the IRO provides that where a deduction has been allowed for any debt incurred for the purposes of the trade, profession or business, the amount of that debt thereafter released shall be deemed to be a receipt of the trade, profession or business.

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.

In the present case, the waived amount will not constitute a profit derived by the Company in the ordinary course of its business. Section 15(1)(c) has no application either as the waiver of the loans and advances is not done in connection with the carrying on of the Company's business. Section 15(2) is also not applicable as no deduction has been allowed in respect of the loans and advances previously made to the Company. Moreover, the waiver is not considered to be a tax avoidance transaction and sections 61 and 61A do not apply.

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