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Advance Ruling Case No. 64


1. The provisions of the Ordinance

  This ruling applies in respect of sections 14, 19C(4), 51(1), 61, 61A and 61B of the Inland Revenue Ordinance (“IRO”).

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2. Background

(a)
Company A and Company B are private limited companies incorporated in Hong Kong. Both companies closed their accounts on 31 December. They became wholly owned subsidiaries of the same group in early 2017.
(b)
With a view to consolidating business operations, people resources, and corporate functions as well as streamlining the overall holding structure for better financial reporting and management, the group management is planning to integrate the business in Hong Kong via court-free amalgamation between Company A and Company B.
(c)
 
Before the amalgamation, the businesses carried on by Company A and Company B were different. Company A was principally engaged in the provision of services related to sourcing manufacturers to affiliates within the group. Company B was a wholesale distributor of office products.
 (d)
Both Company A and Company B recorded accumulated losses prior to the amalgamation. Their pre-amalgamation unutilised tax losses have yet to be finalised.

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3. The arrangement 

(a) The amalgamation will take place in 2018 with Company A as the surviving amalgamated company in accordance with the amalgamation provisions in Division 3 under Part 13 of the Companies Ordinance. The legal effects of the amalgamation are that on and after the effective date of the amalgamation:
(i) Company B ceases to exist as an entity separate from Company A; and
(ii) Company A succeeds to all property, rights and privileges, and all liabilities and obligations of Company B.
(b) After the amalgamation:
 
(i) Company A will continue to carry out its own business of providing services relating to sourcing manufacturers to affiliates within the group; and
 
(ii) The wholesale distribution business carried out by Company B immediately before the amalgamation will be succeeded and carried out by Company A upon and after the amalgamation. After the amalgamation, Company A will continue to sell office products same as what Company B is operating.

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4. The ruling 

(a) Company A shall be treated on or after the effective date of the amalgamation, as if it was the continuation of and the same person in law as Company B for the purposes of the IRO. Accordingly, the succession of any asset (except trading stock), property or liabilities of Company B by Company A shall not constitute a sale, transfer or other disposal of or a change in the nature of those assets, property or liabilities for the purposes of the IRO. For the purposes of section 14 of the IRO, no profit or loss would arise or be deemed to arise in Company A and Company B as a result of the amalgamation.
(b) On the day immediately before the amalgamation, Company B, as the amalgamating company, shall be deemed to have realised its trading stock at open market value. The open market value shall be recognised as the purchase cost for Company A upon amalgamation. Any gain/loss arising from the deemed disposal of Company B’s trading stock at open market value will be taxable/deductible to Company B. Any unutilised losses sustained by Company B prior to the amalgamation will be available for set off against the taxable gain arising from the deemed disposal.
(c) For the purposes of section 19C(4) of the IRO, any unutilised losses sustained by Company A prior to the amalgamation will be available for set off against the assessable profits derived from Company A’s own business (i.e. provision of services related to sourcing manufacturers to affiliates within the group).
(d) For the purposes of section 19C(4) of the IRO, any unutilised losses sustained by Company B prior to the amalgamation will be available for set off against the assessable profits of Company A derived from the same business of Company B succeeded and carried on by Company A (i.e. the wholesale distribution of office products).
(e) For the purposes of section 51(1) of the IRO, Company A, as the amalgamated company, shall furnish for the year of assessment in which the amalgamation occurs:
(i) Profits Tax return for Company B to report Company B’s assessable profits or adjusted loss for the period from the following date of the end date of the last basis period to the day immediately before the effective date of the amalgamation.
(ii) Its own Profits Tax return to report its assessable profits or adjusted loss, including the assessable profits or adjusted loss of the trade or business succeeded from Company B for the period from the effective date of the amalgamation to the end date of the basis period.
(f) Sections 61, 61A and 61B of the IRO will not be applied to the amalgamation.

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5. The period for which the ruling applies

  This ruling applies for the year of assessment 2018/19 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

  There are no assumptions made by the Commissioner.

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7 . Date of ruling issued 

  14 May 2018

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8. Commentary 

 

In the present case, the utilization of pre-amalgamation tax losses of both Company A and Company B after the amalgamation is restricted. Firstly, since the post entry test is not satisfied, the unutilised tax losses sustained by Company A, the amalgamated company, before the two companies became wholly owned subsidiaries of the same group will only be available for set off against the profits derived from its own business. Moreover, applying the same trade test, the unutilised tax losses sustained by Company B, the amalgamating company, before the amalgamation will only be available for set off against the profits derived from the same business succeeded by Company A from Company B. In respect of the relevant assessment practice, please click here.

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