The Inland Revenue Department (IRD) recently updated the guidance on the profits tax treatment of court-free corporate amalgamations on its website1. The revised guidance reflects the views expressed by the IRD in its 2016 annual meeting with the Hong Kong Institute of Certified Public Accountants (HKICPA) (the 2016 meeting), the minutes of which was published in December 20162. The revised guidance does not include any significant changes to the IRD's views but clarifies certain conditions for utilisation of tax losses set out in the original guidance published in December 2015, including the 'same trade test' for utilising the tax losses brought forward from the amalgamating company (i.e. the company that ceased to exist upon amalgamation).
Another issue discussed in the 2016 meeting is the taxation of charter hire income from leasing of aircraft or ships. The IRD confirmed its position on the interpretation of sections 23B, 23C and 23D of the Inland Revenue Ordinance (IRO). It indicated that taxpayers who are not aircraft or ship operators but derive rental income from a pure aircraft or ship leasing business in Hong Kong will be assessed under the general charging section (i.e. section 14) of the IRO, as the special tax regime for aircraft owners (i.e. section 23C or 23D) or ship owners (i.e. section 23B) will not apply to them.
Taxpayers contemplating a corporate amalgamation should consider applying for an advance ruling, in particular if there are considerable uncertainties as to whether the 'financial resources test' or the 'same trade test' can be met and the amount of tax losses at stake is significant. On the other hand, taxpayers that may be affected by the IRD's latest comments on taxation of charter hire income from pure leasing of aircraft/ships should review their current holding and operating structures for carrying on the aircraft/ship leasing business and assess if a restructuring of the business model is necessary.
China South and Hong Kong Tax Leader
Tel: + 2289 3604
Tel: + 2289 5603