Advance Ruling Case No. 71

The provisions of the Ordinance

This ruling applies in respect of sections 14, 16(1), 16(1)(d), 16(2)(c), 16(2)(f)(i) and 18K(3) of the Inland Revenue Ordinance (“IRO”).

Background

(a)

The applicant, Company A, was incorporated in Hong Kong. It is a special purpose vehicle held by its sole shareholder, Company C, on trust for charitable, benevolent or philanthropic purposes.

(b)

Company B was incorporated in Hong Kong. It has engaged in a diversified portfolio of project and infrastructure loan transactions across countries and sectors.

(c)

There is no shareholding relationship between Company A and Company B, and between Company B and Company C.

The arrangement

(a)

Company A will acquire the interest in a portfolio of project and infrastructure loan obligations (“the Portfolio”) from Company B and other institutional lenders by way of novation or participation in Hong Kong. Company A has no material assets other than the Portfolio.

(b)

To finance the acquisition, Company A will issue certain debt instruments (“the Notes”) which are secured by its rights, title, interest and receivables in respect of the Portfolio under a trust deed (“the Collateral”). The Notes consist of different classes that some will be listed on the stock exchange.

(c)

Company A will appoint Company B as the sponsor and collateral manager to provide investment management, administrative and advisory functions in relation to the Portfolio and the Notes.

(d)

Interest payment on the Notes will match with the cash inflow from the Portfolio.

(e)

Company A will appoint various third party service providers to provide administration, reporting and corporate secretarial services in connection with the Portfolio and the Notes.

(f)

Company A will adopt Hong Kong Financial Reporting Standard 9 (Financial Instruments) (“HKFRS 9”) to account for the transactions in the Portfolio and the Notes.

(g)

Company A has undertaken not to carry out any business or activity other than those related to the Portfolio and the Notes. It is expected that Company A will cease to operate when all of the Notes are matured.

The ruling

The IRO applies to Company A’s transactions in relation to the Portfolio and the Notes as follows:

(a)

The assessable profits in respect of the interest income from the Portfolio and bank deposits with authorized institutions will be chargeable to Profits Tax under section 14 of the IRO.

(b)

In case of default on the Portfolio, an impairment loss recognized in respect of credit-impaired loan obligations in accordance with the HKFRS 9 will be deductible under section 18K(3) of the IRO given an election is made by Company A under section 18H(2). If the election is not made, any bad debt arising from default of the loan obligations proved or estimated to the satisfaction of the assessor to have become bad will be deductible under section 16(1)(d) of the IRO.

(c)

Interest expenses incurred on the Notes will be deductible under section 16(2)(c) or 16(2)(f)(i) of the IRO.

(d)

Administrative expenses and service fees incurred in connection with the Portfolio and the Notes, to the extent not being excessive and not of a capital nature under section 17 of the IRO, will be deductible under section 16(1).

The period for which the ruling applies

This ruling will apply for the year of assessment 2023/24 and subsequent years of assessment until the time when the Notes are matured.

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

(a)

Company C will continue holding all the issued share of Company A on trust for charitable, benevolent or philanthropic purposes until the cessation date of Company A.

(b)

All of the legal and beneficial interests of the underlying assets and liabilities of the Portfolio will be vested upon and assumed by Company A.

(c)

Company A will not make any offshore claim on the source of interest income derived from the Portfolio and the Collateral.

(d)

There will not be any arrangement in place such that the interest payable on the Notes will be payable, whether directly or through any interposed person, to Company A or a connected person, not being an excepted person under section 16(2E)(c) or 16(2F)(c) of the IRO.

(e)

Company A will bear the relevant costs and expenses for carrying out in Hong Kong all the activities for the purposes of the transactions in the Portfolio and the Notes.

(f)

All transactions among Company A, Company B and the relevant service providers in relation to the Portfolio and the Notes will be entered into on an arm’s length basis.

Date of ruling issued

20 March 2023