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Nice Cheer case (Non-taxable claim on unrealised gain / fair value gain)

Nice Cheer case (Non-taxable claim on unrealised gain / fair value gain)


Under the judgment of the Court of Final Appeal in Nice Cheer Investment Ltd. V CIR (2013), the unrealized profits based on the market value of trading securities at the statement of financial position are not subject to profits tax on the ground that profits should be real profits arising out of actual activities and should not include notional profits arising from revaluation of trading stock.

Subsequent to the above judgment, the IRD agreed an interim administrative measure to accept 2013/14 to 2017/18 Profits Tax Returns in which the assessable profits are computed on a fair value basis.

After that, a new tax ordinance was enacted to apply in relation to a year of assessment for which the basis period begins on or after 1 January 2018. The new provisions allow taxpayers to elect and align the tax treatment of financial instruments with their accounting treatment.

For taxpayers who adopt a fair value basis on financial instruments and a basis period beginning before 1 January 2018, the IRD extends the interim administrative measure to 2018/19 to 2022/23 Profits Tax Returns.

It is worth noting that after taxpayers elect for aligning tax treatment with accounting treatment, such election is irrevocable, unless the taxpayers apply in writing to the IRD to revoke with good commercial reasons and the IRD satisfies with such reasons.

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We assist our clients in preparation and submission of Hong Kong Profits Tax return and tax computation, advising on whether the election for Nice Cheer case is worthwhile and more beneficial and helping our clients make the election when appropriate.

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