Advance Ruling Case No. 62

1. The provisions of the Ordinance

This ruling applies in respect of sections 14, 33A, 35, 39B, 39D, 51, 61 and 61A of the Inland Revenue Ordinance (“IRO”).

2. Background

(a)

Company A, Company B and Company C (collectively referred to as “the HK Companies”) are companies incorporated in Hong Kong. Their respective parent companies and common ultimate holding company are incorporated outside Hong Kong.

(b)

The HK Companies are principally engaged in property investment. They collectively own a commercial building for long-term investment and letting purposes.

(c)

The Group, of which the HK Companies are members, adopts a sole ownership holding structure where one property holding company holds the entire interest in one property. In order to standardize property holding structure, and enhance management and operational efficiency, the Group has planned to amalgamate Company B and Company C horizontally into Company A (“the Amalgamation”).

3. The arrangement

(a)

Company B and Company C will be amalgamated into Company A by 30 June 2017.

(b)

The Amalgamation is governed by the amalgamation provisions in Division 3 under Part 13 of the Companies Ordinance (Cap. 622). The legal effect of the Amalgamation on and after the effective date of the Amalgamation includes:

(i)

Company B and Company C cease to exist as entities separate from Company A;

(ii)

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

(iii)

Any agreement entered into by Company B and Company C may be enforced by or against Company A.

(c)

After the Amalgamation, Company A, as a sole owner, will principally and solely engaged in the rental business of the entire building.

4. The ruling

(a)

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

(b)

For the purpose of section 14 of the IRO, no profits or loss will arise or be deemed to arise in any of the HK Companies as a result of the Amalgamation.

(c)

For the purpose of section 33A of the IRO, Company A is regarded as being entitled to the relevant interests in all commercial building and structures of Company B and Company C. Section 35 will not be applicable upon the Amalgamation. Annual allowances will be available to Company A, subject to balancing charges on disposal not exceeding the aggregate of the allowances made to the HK Companies.

(d)

For the purpose of section 39B of the IRO, the unallowed reducing value of the relevant machinery or plant of Company B and Company C will be used for computing the annual allowances made to Company A, subject to balancing charges on disposal not exceeding the aggregate of the allowances made to the HK Companies. Section 39D will not be applicable upon the Amalgamation.

(e)

Company B and Company C will not be granted any annual allowances in respect of commercial structures in (c) above and the machinery or plant in (d) above for the year of assessment in which the Amalgamation occurs.

(f)

For the purpose of section 51(1) of the IRO, Company A, as the surviving amalgamated company, will furnish:

(i)

respective Profits Tax returns for Company B and Company C to report their assessable profits or adjusted loss for the period from 1 July 2016 to the day immediately before the effective date of the Amalgamation; and

(ii)

its own Profits Tax return for the year of assessment 2017/18 to report its assessable profits, including the assessable profits or adjusted loss of the trade or business succeeded from Company B and Company C for the period from the effective date of the Amalgamation to 30 June 2017.

(g)

For the purpose of section 51(6) of the IRO, Company B and Company C will not be required to notify the Commissioner of their cessation of trade or business on the condition that Company A will inform the Commissioner of the Amalgamation in writing within one month from the effective date of the Amalgamation.

(h)

Sections 61 and 61A of the IRO will not be applied 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

The HK Companies, which are held by companies not formed or registered in Hong Kong, can be amalgamated in accordance with the provisions in Division 3 of Part 13 of the Companies Ordinance and the ruling so granted will only be applied after the issue of a certificate of amalgamation by the Companies Registry.

7 . Date of ruling issued

21 June 2017

8. Commentary

In the present case, the HK Companies collectively own a commercial building and run a single letting business in respect of the building. There is genuine need for an amalgamation to achieve operational efficiency. The present case also illustrates the treatment of balancing charges upon the Amalgamation and subsequent disposal.

(This commentary is not a legally binding statement and it does not form part of the Ruling. In respect of the relevant assessment practice, please click here.)