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Advance Ruling Case No. 60

1. The provisions of the Ordinance

  This ruling applies in respect of sections 14 and 26(a) of the Inland Revenue Ordinance (“IRO”).


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2. Background

Applicant A and Applicant B (collectively referred to as “the Applicants”) are investment holding companies incorporated in Hong Kong.  Both of their sole shareholders are residents of Country C.  Prior to the proposed arrangement, Applicant A and Applicant B held 59% and 41% of equity shares of Company D, a company incorporated in Hong Kong.
At the relevant times, the Applicants earned dividend income from Company D, bank interest income and exchange gains.  All such income were exempt from Hong Kong Profits Tax.
Company E was incorporated in the British Virgin Islands and is owned by two private foundations established in Panama, namely Foundation A and Foundation B, in the percentages of 59% and 41% respectively.  The only assets of Company E are Investment Portfolio A and Investment Portfolio B.  The two investment portfolios are maintained by a bank in Country F and comprised money, equity shares, bonds and hedge funds placed, listed or traded outside Hong Kong.

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3. The arrangement 

(a) Applicant A and Applicant B have planned to acquire all shares in Company E from Foundation A and Foundation B respectively.
(b) After the acquisition, Company E will distribute Investment Portfolio A to Applicant A and Investment Portfolio B to Applicant B in the form of dividend.  Subsequently, Company E will be deregistered or liquidated.  The two investment portfolios will be managed by an agent in Country G.

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4. Ruling declined

The Commissioner declines to make a ruling on: whether the distribution of Investment Portfolio A and Investment Portfolio B from Company E to the Applicants in the form of dividend will be excluded under section 26(a); and whether the interest income, dividend and disposal gains to be derived by the Applicants from Investment Portfolio A and Investment Portfolio B will be chargeable under section 14. The reasons are as follows:

(a) The intended purpose of the arrangement is for Applicant A and Applicant B to acquire Investment Portfolio A and Investment Portfolio B respectively.  However, the Applicants have not provided sufficient information and satisfactory explanation for the proposed arrangement which is unduly complicated and difficult to comprehend.
(b) The facts do not support the Applicants’ claim that the parties involved are unrelated.  Some basic and common contractual terms are not included in the purchase and sale agreements for the acquisition of Company E.  The share transfer prices are not determined on an arm-length basis.  There is no information showing that the Applicants have sufficient funds to finance the acquisition.
(c) The Commissioner is not convinced that the arrangement is set up for the commercial reasons given in the application.  The implementation hinges on the obtaining of a favourable tax ruling.  The Applicants’ beneficial owners are residents of Country C.  The Applicants neither maintain office, nor employ staff in Hong Kong.  The investment portfolios will be kept and managed outside Hong Kong.  The underlying securities of the investment portfolios are listed and will be traded outside Hong Kong.
(d) Company E, Foundation A, Foundation B, their representative, advisor and agent were incorporated or operated in offshore jurisdictions which impose minimal amount of tax and may not require the preparation of audited financial statements.  Company E and its directors have been implicated in the Panama Papers.

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5 . Date of Notification 


21 September 2016


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6. Commentary 


Pursuant to section 3(d), Part I, Schedule 10 of the IRO, the Commissioner shall not make a ruling if he considers that the applicant has not provided sufficient information in relation to the application.  The requirements are listed out in paragraph 19 of the Departmental Interpretation and Practice Notes No. 31 (“DIPN 31”) which include all relevant facts and documents relating to the arrangement for which the ruling is sought and a complete description of each proposed transaction.  The Department’s stance of not helping with tax planning is stated in paragraph 13 of DIPN 31.

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