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Advance Ruling Case No. 67

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 Applicant is a wholly owned subsidiary of Company A, which belongs to a conglomerate group.
(b) In a restructuring exercise, the group decided to inject a business unit into Company A.  The Applicant was set up to hold the equity interest in the business unit.
(c) The Applicant obtained funding from Company A on divers dates (the Financings) to finance its acquisition of the equity interest in the business unit and subsequent capital injections. The Applicant’s only business activity is the holding of equity interests as a long term investment.
(d) During the annual audit for the year 2018, Company A made a provision for impairment loss on the amounts due from the Applicant, which were mainly composed of the Financings.

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3. The arrangement 

(a) Having considered the Applicant’s business nature and the absence of operating revenue, Company A concluded that the amounts due from the Applicant would be unlikely to be recovered.  To clear non-performing loans or receivables, Company A contemplated to waive part of the amounts due from the Applicant.  Company A may also waive the remainder (or lesser) subsequently.
(b) Upon the enforcement of the waiver(s), the Applicant would recognise the amounts waived as a capital reserve.


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4. 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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5. The ruling 

(a) The Applicant will not be chargeable to Profits Tax under sections 14(1), 15(1)(c) or 15(2) of the IRO in respect of the recognition of the capital reserve upon the enforcement of the proposed waiver(s) of the amounts due to Company A.
(b) Sections 61 and 61A of the IRO will have no application to the transactions identified in the arrangement, nor any part thereof.


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6. The period for which the ruling applies

  This ruling applies for the years of assessment 2019/20 to 2021/22.

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7. Date of ruling issued

  17 December 2020

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8. Commentary

(a) Section 14(1) of the IRO provides that Profits Tax shall be charged on every person who carries on a trade, profession or business in Hong Kong in respect of its assessable profits arising in or derived from Hong Kong from such trade, profession or business (excluding profits arising from the sale of capital assets).
(b) Section 15(1)(c) of the IRO provides that 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, other than sums in connection with capital expenditure made by the person, shall be deemed to be chargeable receipts.
(c) 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 chargeable receipt.
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 Applicant is an investment holding company.  The waived amounts will not constitute profits derived by the Applicant in the ordinary course of its business.  Section 15(1)(c) has no application either as the waived amounts are mainly in connection with capital expenditures made by the Applicant in acquiring the equity interest in the business unit for long term investment.  Section 15(2) is also not applicable as no deduction has been allowed in respect of the Financings.  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.)