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June 22, 2021
Hong Kong enacts legislation regarding tax treatment of court-free amalgamation of companies
Hong Kong enacted the Inland Revenue (Amendment) (Miscellaneous Provisions) Bill 2021 (the New Law) on 11 June 2021,1 which addresses the tax implications of court-free amalgamations of companies.2 The New Law applies to court-free amalgamation of companies occurring on or after 11 June 2021.
This Alert summarizes the key provisions of the New Law.
The key provisions of the tax treatment are:
Succession of trading stock
If trading stock succeeded from an amalgamating company continues to be used as trading stock of the amalgamated company (i.e., the surviving company), such trading stock is treated as being transferred at its book cost at the date of the amalgamation.3
If trading stock originally held by the amalgamating company becomes a capital asset upon amalgamation:
Succession of capital assets
If a capital asset succeeded from an amalgamating company continues to be used as a capital asset after amalgamation, the amalgamated company can continue to claim tax deductions or allowances in respect of the asset based on the tax written-down value carried forward by the amalgamating company. When such capital asset is subsequently disposed of by the amalgamated company, the tax balancing adjustment or claw-back on such disposal is computed by reference to the sum of the tax deductions and allowances previously claimed by the amalgamating company and the amalgamated company.
If a capital asset originally held by the amalgamating company becomes trading stock upon amalgamation:
Utilization of an amalgamating company’s tax losses carried forward
Utilization of tax losses of an amalgamating company is subject to the following conditions:
Utilization of pre-amalgamation tax losses sustained by the amalgamated company
Set-off of pre-amalgamation losses sustained by the amalgamated company against the assessable profits of the business succeeded from an amalgamating company is subject to following conditions:
In addition to the above conditions, no utilization of tax losses would be allowed (whether sustained by the amalgamating company or the amalgamated company) unless it is proved to the satisfaction of the Commissioner that:
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
Ernst & Young LLP (United States), Hong Kong Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York