Advance Ruling Case No. 65

1. The provisions of the Ordinance

The ruling applies in respect of sections 14, 19C(4), 33A, 35, 39B, 39D, 51(1), 61, 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. Both companies provide information technology services in Hong Kong.

(b)

In July 2012, Company B became a directly wholly owned subsidiary of Company A. Both companies closed their accounts on 31 December.

(c)

As Company A and Company B carried on the same line of business, it was the management’s decision to amalgamate two companies for economies of scale.

(d)

Company A recorded accumulated losses prior to the amalgamation.

3. The arrangement

(a)

In 2017, Company A and Company B were amalgamated pursuant to Division 3 under Part 13 of the Companies Ordinance, with Company A as the amalgamated company.

(b)

After the amalgamation:

(i)

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

(ii)

Shares of Company B were cancelled without payment or other consideration; and

(iii)

Company A succeeded to all the property, rights and privileges, and all the liabilities and obligations of Company B, without any sale of assets or liabilities.

4. The ruling

(a)

Upon the amalgamation, Company A succeeded to all the assets and liabilities of Company B. Such succession shall not constitute a sale, transfer or other disposal of or a change in the nature of those assets and liabilities for the purposes of the IRO. For the purpose of section 14 of the IRO, no profit or loss shall arise or be deemed to arise in Company A and/or Company B as a result of the amalgamation.

(b)

For the purpose of section 19C(4) of the IRO, unutilized tax losses sustained by Company A prior to the amalgamation will be carried forward and will be available for set off against the Assessable Profits derived after the amalgamation as follows:

(i)

Tax losses incurred before Company B becoming a wholly owned subsidiary of Company A can only be used to set off against profits derived by Company A from its own business; and

(ii)

Tax losses incurred after Company B becoming a wholly owned subsidiary of Company A can be used to set off against profits derived from the business succeeded from Company B.

(c)

For the purpose of section 33A of the IRO, Company A is regarded as being entitled to the relevant interest in all commercial buildings and structures of Company B and annual allowances will be available to Company A, subject to balancing charges on disposal not exceeding the aggregate of the allowances made to Company A and Company B. Section 35 of the IRO will not be applicable arising out of the amalgamation.

(d)

For the purpose of section 39B of the IRO, the unallowed reducing value of the relevant machinery or plant of Company B will be used for computing the initial/annual allowances made to Company A, subject to balancing charges on disposal not exceeding the aggregate of the allowances made to Company A and Company B. Section 39D(2) of the IRO will not be applicable arising out of the amalgamation.

(e)

Company B will not be granted any initial/annual allowances in respect of the commercial buildings and 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 amalgamated company, shall furnish:

(i)

Profits Tax Return of Company B for the year of assessment 2017/18 to report Company B’s assessable profits or adjusted loss for the period from 1 January 2017 to the day immediately before the amalgamation; and

(ii)

Its Profits Tax Return for the year of assessment 2017/18 to report its assessable profits or adjusted loss, including the assessable profits or adjusted loss of the business succeeded from Company B for the period from the effective date of the amalgamation to 31 December 2017.

(g)

Sections 61, 61A and 61B 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

(a)

Company A continued to carry on its business until the amalgamation and will continue to do so after the amalgamation.

(b)

The business carried on by Company B immediately before the amalgamation will be succeeded and carried on by Company A after the amalgamation.

7 . Date of ruling issued

12 June 2018

8. Commentary

In the present case, Company A recorded tax losses before it acquired Company B. Hence, the utilization of pre-amalgamation tax losses of Company A after the amalgamation is restricted. Since the post entry test is not satisfied, the unutilised tax losses sustained by Company A before Company B became a wholly owned subsidiary of Company A will only be available for set off against the profits derived from its own business.

For the unutilized tax losses incurred after Company B becoming a wholly owned subsidiary of Company A, in view of the fact that all three tests, namely financial resources test, trade continuation test and post entry test, are satisfied, they can be used to set off against profits derived from the business succeeded from Company B after the amalgamation.

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.)