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Advance Ruling Case No. 9

1. The provisions of the Ordinance

  This ruling applies in respect of sections 14, 16 and 23(1)(a) of the Inland Revenue Ordinance ("IRO").


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2. Background

  The applicant "LC" is a life insurance company offering various life insurance products in the Hong Kong market. LC developed a new life insurance product called "X". X is a unit linked insurance product which primarily provides the policyholder with life insurance coverage and the ability to invest in twelve different mutual funds. X qualifies as Class C (i.e. linked long term) life insurance business as specified in Part 2 of the First Schedule to the Insurance Companies Ordinance.

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3. The arrangement 

(a) Premiums paid by the policyholder in respect of X are invested by LC in various investment funds nominated by the policyholder. Upon receipt of the policyholder's premium, LC deducts 5% as its buy/sell charge and invests the balance of the premium by buying units in the various mutual funds in accordance with the policyholder's instructions. At the beginning of each month LC deducts from the policyholder's notional holdings in the investment funds sufficient units to cover the life insurance charge. The life insurance charge is determined using the same parameters as apply to the company's traditional life products.
(b) The investment funds and all assets in the investment funds are solely, legally and beneficially owned by LC at all times.
(c) The policyholder may switch investment funds up to a maximum of six times per year without cost. For additional changes in any year, LC imposes a switching charge of 1%.
(d) If a policyholder surrenders a policy before the eighth anniversary of its life coverage, an early surrender charge may apply. The surrender charge is the life insurance premium applicable when life coverage is purchased. The surrender charge is expressed as a percentage of the initial surrender charge and grades down to zero by the eighth coverage anniversary.
(e) While LC receives a premium from policyholders in respect of the X product, the total premium less the buy/sell charge is invested in the mutual funds nominated by the policyholder. LC derives income from the X product by way of the monthly life insurance charge and the other charges imposed on the policyholder. The income from these sources is retained by LC to cover its operating costs and to invest for future liabilities.

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4. The ruling

  The IRO applies to the X product as follows -
(a) The assessable profits in respect of X will be calculated under section 23(1)(a) of the IRO;
(b) The "premiums from life insurance business" for the purposes of section 23(1)(a) of the IRO are the premiums paid by policyholders to LC in respect of the X product and not the monthly charge deducted by LC from policyholders' investment funds;
(c) Income derived by LC by way of buying, selling and switching charges in respect of X is not assessable under section 14 of the IRO;
(d) Income derived by LC by way of the management charge in respect of X is not assessable under section 14 of the IRO;
(e) Income derived by LC in respect of the surrender charge imposed in years one to eight in respect of X is not assessable under section 14 of the IRO and
(f) Expenses incurred by LC in respect of the buying, selling, switching, management and surrender charges are not deductible under section 16 of the IRO.

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5. The period for which the ruling applies

  This ruling shall apply to the 2001/02 and 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

  No assumptions were made by the Commissioner.


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7 . Date of ruling issued 

  24 January 2003.