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Advance Ruling Case No. 57

1. The provisions of the Ordinance

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


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2. Background

Company A and Company B are companies incorporated in Hong Kong.   Both of them have been engaging in trading of the same type of products.  Up to April 2012, the two companies were members of Group A and Group B respectively and were operated separately with different management and control.
In April 2012, Group B acquired Group A.  Since then, Company A and its holding company have become part of Group B.  Besides, Company A and Company B have shared the same office, staff and company website, and purchased goods from same suppliers.  In September 2013, all shares of Company B were transferred to the holding company of Company A.

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3. The arrangement 

(a) Group B plans to amalgamate Company A into Company B (“the Amalgamation”) in the year of assessment 2015/16 under Division 3 of Part 13 of the Companies Ordinance (Cap. 622) (“CO”).
(b) Pursuant to the CO, the legal effect of the Amalgamation is that on and after the effective date of the Amalgamation:
(i) Company A ceases to exist as an entity separate from Company B; and
(ii) Company B succeeds to all property, rights and privileges, and all liabilities and obligations of Company A.

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4. The ruling

 Subsequent to the Amalgamation, losses incurred by Company B prior to the Amalgamation may be applied to set off against profits derived from the trade or business succeeded by Company B from Company A.  The Commissioner is however satisfied that the sole or dominant purpose of the Amalgamation is not for obtaining tax benefit after taking into account the insignificant amount of tax losses of Company B and its role as regional headquarters.  Furthermore, but for the Amalgamation, Company B would have adequate financial ability to take over the trade or business of Company A by way of acquisition on arm’s length terms.  On such basis, the Commissioner has made the rulings as follows:

(a) Sections 61A and 61B of the IRO will not be applied to the Amalgamation; and
(b) Pursuant to section 19C(4) of the IRO, the tax losses of Company B brought forward from the year of assessment 2014/15 will be utilized to set off against its assessable profits for the subsequent years of assessment.  The assessable profits for the year of assessment 2015/16 and thereafter will include profits derived from the same trade or business previously carried on by Company A but succeeded by Company B as a result of 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

Company B will continue to carry on its trade or business until and after the Amalgamation.
The trade or business carried on by Company A immediately before the Amalgamation will be succeeded and carried on by Company B upon and after the Amalgamation.
There is or will be no significant increase in the tax losses sustained by Company B during the period from 1 January 2014 to the date immediately before the Amalgamation when comparing with the amount of tax losses recorded as at 31 December 2013.

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7 . Date of ruling issued 


26 August 2015

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8. Commentary 


Section 61A of the IRO counteracts transactions entered into for the sole or dominant purpose to obtain a tax benefit.

Section 61B of the IRO counteracts against tax avoidance by empowering the Commissioner to refuse to set off losses brought forward where he is satisfied that the sole or dominant purpose of a change in shareholding was the utilization of those losses to avoid or reduce tax liability.

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, Company A and Company B have been carrying on the same trading activities and sharing common resources.  Their amalgamation will achieve, among other things, operational efficiency and cost savings.  As Company B would have adequate financial ability to take over Company A’s business and the tax losses involved is insignificant, it is considered that sections 61A and 61B should not be applied to the present arrangement.

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