Count-free Company Amalgamations

1. Profits tax consequences of a court-free amalgamation under the Companies Ordinance (Cap. 622) may not be the same as those in specific private merger ordinances in Hong Kong or in universal succession cases under foreign laws, which are not carried out for the purpose of obtaining tax benefits.
2. ‘If the Commissioner is satisfied that the court-free amalgamation is not carried out for the purpose of obtaining tax benefits, the provisions in sections 61A or 61B will not be made applicable to the amalgamation (e.g. the denial of losses carried forward from the amalgamating company to the amalgamated company) and the amalgamated company will generally be treated as far as possible as if it is the continuation of and the same person as the amalgamating company for the purposes of the Inland Revenue Ordinance.
3. Pending the decision to amend the provisions in the Inland Revenue Ordinance to provide for a statutory framework to address the issues relating to court-free amalgamations, the Assessor will make assessment in accordance with the following practice:

Amalgamation with sale of assets

4. If the court free amalgamation is structured with a sale of assets on an arm’s length basis, the provisions relating to sale of assets will be applied to such amalgamation to assess any deemed trading receipts and to make balancing adjustments.

Amalgamation without sale of assets

5. The amalgamating company is treated on the day immediately before the amalgamation as having:

• ceased to carry on its trade, profession or business; and
• realized its trading stock in the open market.

5. The amalgamated company is treated on the date of amalgamation as having:

• continued to carry on the trade, profession or business of the amalgamating company by way of succession;
• qualified for annual allowances in respect of commercial/industrial buildings or structures by way of its entitlement to the relevant interests subject to balancing charges on disposal not exceeding the aggregate of the allowances made to it and the amalgamating company;
• qualified for annual allowances in respect of machinery or plant by reference to reducing values still unallowed subject to balancing charges on disposal not exceeding the aggregate of allowances made to it and the amalgamating company;
• qualified for any unexpired allowances/deduction in respect of capital expenditure incurred by the amalgamating company under sections 16B, 16E, 16EA, 16F, 16G and 16I subject to the assessment of proceeds as trading receipts on sale;
• entitled to deductions that the amalgamating company would have been allowed but for the amalgamation; and
• earned the amount that would have been income or trading receipt of the amalgamating company but for the amalgamation.

Tax losses

7. Tax losses are specific to a company and cannot be transferred to other group companies. Group loss relief and deduction for acquired losses through court-free amalgamation procedure are not to be allowed.
8. Tax losses can be used to set off against profits of the amalgamated company on the following conditions:

• tax losses are incurred after the amalgamating company and the amalgamated company have become wholly owned subsidiaries of the same group;
• tax losses are carried forward by the amalgamating or amalgamated company in a trade or business, which continues until amalgamation;
• tax losses if brought forward in the amalgamated company, the amalgamated company has adequate financial resources (excluding intra-group loans) to purchase the trade or business if not via amalgamation;
• tax losses brought forward from the amalgamating company can only be used to set off against the profits of the amalgamated company derived from the same trade or business succeeded from the amalgamating company.

7. The amalgamating company and the amalgamated company should seriously consider applying for an advance ruling under section 88A if tax losses available for set off on amalgamation are material in quantum.

Profit tax return

10. The amalgamated company should inform the Commissioner in writing of the amalgamation within one month from the date of the amalgamation and submit a profits tax return for each amalgamating company for the year of assessment in which the date the amalgamating company is regarded as having ceased its business falls.

Rights and obligations

11. The amalgamated company should undertake all obligations imposed on the amalgamating company, in particular record keeping requirement, return filing requirement and provision of information requirement, and shall assume all its tax liabilities, certain or contingent, in respect of the year of assessment in which the amalgamating company is regarded as having ceased its business and all prior years of assessment.