The Inland Revenue (Amendment) (Miscellaneous Provisions) Bill 2021 (“the Bill”) was gazetted on 19 March 2021 in order to codify the current assessing practice for court-free amalgamation into the Inland Revenue Ordinance.
The proposed assessing practice largely follows the interim assessing practice currently adopted by the Inland Revenue Department (“the IRD”). The market focus remained to be the attitude of the IRD on the utilisation of pre-amalgamation tax losses as it seems to be the best incentives to corporations given the high costs of amalgamation.
Pursuant to the Bill, the IRD has no intention to relax the requirements for utilisation of tax losses as it may significantly reduce the Profits Tax revenues of the HKSAR Government. The following requirements have to be fulfilled for unrestricted utilisation of pre-amalgamation tax losses of Amalgamating company (Disappeared entity) and Amalgamated company (Surviving entity):
Tax Loss Utilisation Requirements:
Amalgamating Company (Disappeared Entity)
Same Business: Pre-amalgamation losses can only be used to off-set against profits of same business
Post Entry: Pre-amalgamation losses can only be used when they were incurred during the time both companies are wholly vertically or horizontally related (i.e., 100% shareholding relationship)
The tax losses of amalgamating company will lapse if the above conditions are not fulfilled.
Amalgamated Company (Surviving Entity)
Financial Resources: The amalgamated company has sufficient financial resources (excluding related party loans) to acquire the business of the amalgamating company
Business Continuation: The amalgamated company continued to carry out loss-sustaining business until the date of amalgamation
Post Entry: Same as above
The tax losses of amalgamated company can only be used to set-off against profits of its own business (but not business from amalgamating company) if the above conditions are not fulfilled.
Points to Note
Due to strict requirements for loss utilisation, enterprises should thoroughly study the tax implications arising from amalgamation before they implement the group restructuring decisions.
For utilisation of pre-amalgamation tax losses sustained by the amalgamating company, we expect the IRD would continue to be strict in assessing the Same Business Requirements. In the website of the IRD, it has cited that a high-end Japanese Restaurant and a low-end Italian Restaurant are unlikely to be considered as carrying on same business.
Retail Industry hit hard during COVID-19. Some of them urgently need to reduce their tax liabilities through utilising tax losses via amalgamation. It is common that they maintain a large number of companies for holding the operations of each retail shops. They should plan carefully on a combination of amalgamation to reduce the risk of tax loss disallowance.
If the amalgamation method does not give favourable tax treatments to your group, you may consider other tax planning options (e.g., business restructuring) in order to utilise the tax loss. We would be pleased to provide advice on your specific situation
