Advance Ruling Case No. 1

1. The provisions of the Ordinance

This ruling applies in respect of sections 19C and 61B of the Inland Revenue Ordinance ("IRO").

2. Background

(a)

X Ltd. was incorporated in Hong Kong on 30 July 1996. Its issued and paid up capital consisted of two shares of $1 each. One share was issued to Mr A. The other one share was issued to Mr B.

(b)

X Ltd. operated a Chinese restaurant business. It commenced business on 11 May 1997 and ceased operation on 9 March 1998.

(c)

The audited accounts of X Ltd. covering the period from 30 July 1996 to 30 June 1998 showed accumulated loss of $7 million odds.

(d)

As at 30 June 1998 Mr A and Mr B had advanced directors' loans of $6,500,000 odds and $600,000 odds to X Ltd. respectively.

3. The arrangement

(a)

The one share held by Mr B in X Ltd. is proposed to be transferred to the other shareholder Mr A. In addition, the director's loan from Mr B in the amount of $600,000 odds would also be transferred to Mr A for a nominal consideration of $1.

(b)

X Ltd. proposed to operate a completely new restaurant/karaoke business after the change of shareholding.

(c)

X Ltd. would continue to be managed by Mr A after the change of shareholding. Mr B would continue to be a director of X Ltd.

4. The ruling

(a)

The tax loss is and continues to be available to set off against future profits, if any, of X Ltd. under section 19C of the IRO.

(b)

Section 61B of the IRO is considered not applicable.

5. The period for which the ruling applies

This ruling applies for the year of assessment 2000/2001 and subsequent years of assessment.

6. The material assumptions in respect of a future event or any other matter made by the Commissioner

This ruling is based on the assumption that the tax loss incurred in the year of assessment 1997/98 is ascertained and available for carry forward.

7. Date of ruling issued

17 May 2000.