Advance Ruling Case No. 61

1. The provisions of the Ordinance

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

2. Background

(a)

Company A and Company B are private limited companies incorporated in Hong Kong. They became wholly owned subsidiaries of the same group in late 2015.

(b)

With an aim to streamline the overall group structure, enhance the management and operational efficiency and minimize cost, Company A was amalgamated into Company B (“the Amalgamation”) in early 2017.

(c)

Before the Amalgamation, the business carried on by Company A and Company B was not exactly the same. Company A was principally engaged in the provision of trustee support and corporate administration support services. Company B was a registered trust company under the Trustee Ordinance and its principal activities were to act as an agent of trustees and provision of trustee and fiduciary services. Both companies closed their accounts on December 31.

(d)

Both Company A and Company B recorded accumulated losses prior to the Amalgamation. The pre-Amalgamation tax losses of Company A and Company B available for set off upon and after the Amalgamation have yet to be finalized.

3. The arrangement

(a)

The Amalgamation took place pursuant to Division 3 of Part 13 of the Companies Ordinance.

(b)

On and after the effective date of the Amalgamation:

(i)

Company A ceases to exist as an entity separate from Company B;

(ii)

shares of Company A have been cancelled without payment or consideration; and

(iii)

Company B succeeds to all property, rights and privileges, and all liabilities and obligations of Company A.

4. The ruling

(a)

Upon the Amalgamation, Company B has succeeded to all assets, property and liabilities of Company A. Such succession will not constitute a sale, transfer or other disposal of or a change in the nature of those assets, property or liabilities for the purpose of the IRO. Any provisions or accruals to Company A will be carried over to and vested with Company B without any changes to the related tax base and treatment.

(b)

For the purpose of section 14 of the IRO, no profit or loss shall arise or be deemed to arise in Company A and Company B as a result of the Amalgamation.

(c)

For the purpose of section 19C(4) of the IRO, any unutilized tax losses sustained by Company A prior to the Amalgamation (subject to finalization) will be available to set off against Company B’s assessable profits for the year of assessment 2017/18 and subsequent years of assessment, provided that such assessable profits are derived by Company B from the same trade or business succeeded from Company A.

(d)

For the avoidance of doubt,

(i)

in no circumstances shall the tax losses of Company A be utilized to set off against the assessable profits derived by Company B from services which can only be performed by it as a registered trust company under the Trustee Ordinance;

(ii)

any unutilized tax losses sustained by Company B before it and Company A became wholly owned subsidiaries of the same group can only be used to set off against the assessable profits derived by Company B from its own trade or business.

(e)

For the purpose of section 51(1) of the IRO, Company B as the surviving amalgamated company, shall furnish Profits Tax returns for the years of assessment up to 2016/17 for Company A to report Company A’s assessable profits or adjusted loss covering the basis periods up to the day immediately before the Amalgamation.

(f)

Sections 61A and 61B of the IRO will not be made applicable to the Amalgamation.

5. The period for which the ruling applies

This ruling applies for the year of assessment 2017/18 and all subsequent years of assessment.

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

(a)

The trade or business carried on by Company A immediately before the Amalgamation has been succeeded and carried on by Company B upon and after the Amalgamation.

(b)

Tax losses were sustained by Company A and carried forward to Company B upon the Amalgamation.

7 . Date of ruling issued

18 April 2017

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, the tax losses of Company A cannot be utilized to set off against the assessable profits derived by Company B from services which can only be performed by it as a registered trust company under the Trustee Ordinance since the same trade test is not satisfied for that part of business. Moreover, since the post entry test is not satisfied, the unutilized tax losses sustained by Company B before both companies became wholly owned subsidiaries of the same group can only be used to set off against the assessable profits derived by Company B from its own trade or business. 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.)