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Advance Ruling Case No. 7
1. The provisions of the Ordinance
| This ruling applies in respect of sections 19C and 61A of the Inland Revenue Ordinance ("IRO"). |
2. Background
| (a) | X Ltd. was incorporated in Hong Kong in 1982. It is a registered securities dealer in Hong Kong and its principal activity is securities brokering. It currently holds three trading rights of the Stock Exchange of Hong Kong Ltd. ["the Exchange"]. |
| (b) | Y Ltd. was incorporated in Hong Kong on 28 February 1989 and it is an associated company of X Ltd. It is a registered dealer under the Securities Ordinance. It currently holds 5 trading rights of the Exchange. Its principal activities are the provision of brokerage services, underwriting services and securities margin trading to retail clients. |
3. The arrangement
| (a) | X Ltd. will transfer all of its trading rights of the Exchange to Y Ltd. by January 2002 at arm's length value after which X Ltd. will act as an introductory broker subcontracting all orders to Y Ltd. for execution. |
| (b) | X Ltd. will continue to serve only its two existing customers and will pass part of the commissions received from these customers to Y Ltd. Which will in turn make a rebate payment to X Ltd. not exceeding the amount of commissions so received. |
| (c) | Y Ltd. will provide back-office services to X Ltd. in return for a service fee. |
4. The ruling
| (a) | The proposed transfer of the trading rights of the Exchange to Y Ltd. is not one which would fall within the terms of section 61A of the IRO. |
| (b) | The tax loss of X Ltd. is and continues to be available for setoff against future profits of the company, if any, under section 19C(4) of the IRO. |
5. The period for which the ruling applies
| This ruling will apply in the year of assessment 2001/02 and subsequent years of assessment. |
6. The material assumptions in respect of a future event or any other matter made by the Commissioner
| (a) | The principal activity of X Ltd. will remain securities brokering. |
| (b) | Y Ltd. will not shift any of its income or profits, or any income or profits that would otherwise be accrued to it, to X Ltd. |
| (c) | Y Ltd. will finance the acquisition of the trading rights of the Exchange by means of its existing shareholders' equity. As Y Ltd. will not incur any interest expenses or expenses of a similar nature as a result of the acquisition, no deduction will be claimed for any such expense. |
| (d) | The fees charged by Y Ltd. in return for the back-office services provided to X Ltd. will be determined on an arm's length basis. |
7 . Date of ruling issued
| 7 December 2001. |