Global Tax Alert | 5 December 2013
Hong Kong introduces new court-free amalgamation
The new Hong Kong Companies Ordinance will introduce provisions to facilitate an amalgamation of two or more wholly-owned companies within a group without the need of a court approval. Relevant provisions are expected to be effective from 3 March 2014.
A court-free amalgamation refers to a transfer of business assets and liabilities from one or more transferor (amalgamating) companies to a surviving (amalgamated) company under the procedures of the new Companies Ordinance. Upon amalgamation, the amalgamated company will continue as one company, assuming the assets, rights, liabilities and obligations of the amalgamating companies.
An amalgamation under the new Companies Ordinance will not require the amalgamated company to pay any consideration for the acquisition of the business assets and liabilities of the amalgamating companies. This Alert summarizes the tax ramifications of the new provision.
Desired tax consequences
Currently, there are no corresponding amendments to the Hong Kong tax laws to specifically address a court-free amalgamation of companies. Accordingly, the desired tax consequences of a court-free amalgamation would have a tax free effect on the amalgamating companies on the transfers.1 Similarly, the amalgamated company would be allowed to inherit the taxable profits or allowable losses of the businesses formerly carried on by the amalgamating companies on the carry-over basis.
Possible adverse tax consequences
In the absence of any amendments, the current provisions of the Hong Kong tax laws could regard certain assets to have been disposed by the amalgamating companies at their fair market values on the date of the amalgamation, resulting in an immediate tax ramification.
Simultaneously, the amalgamated company would not have incurred any costs for acquiring the assets and liabilities and therefore would probably have no cost basis to claim any taxable deductions for the sale of inventory and fixed assets transferred pursuant to the amalgamation. In addition, tax losses may not be carried over to the amalgamated company.
Considerations for the introduction of new tax rules
Given the uncertainties and possible adverse tax consequences discussed above, it would be beneficial for Hong Kong to introduce new tax rules to facilitate a court-free amalgamation of companies. Key principles of the new tax rules would be to treat the amalgamation as a continuation of the businesses of the amalgamating companies by the amalgamated company, through tax-free transfers of tax attributed associated with the transferred assets to the amalgamating companies and provide cost bases for the amalgamated company.
Reclassification of assets transferred2
Under the circumstances where assets originally held on revenue or trading account by an amalgamating company are held as assets on capital account (e.g., investments) in the books of the amalgamated company upon amalgamation, the new tax rules may need to follow the current practice under the case-law principle contained in Sharkey v Wernher3 under which, where a company changes assets classifications for tax purposes, the change would be treated as if the assets were disposed of at their fair market values at the time of the change of intent that resulted in reclassification.
Carryover of tax losses issues
A consideration should be given to effect tax losses to be carried over from the amalgamating companies to the amalgamated company.
Other tax issues
There are other tax issues that may need to be specifically addressed under the tax rules concerning a court-free amalgamation, including tax return filing for the year of amalgamation, the applicability of an advance ruling granted to an amalgamating company and interest deductibility issue by the amalgamated company concerning money borrowed for acquisition.
1. For example, no depreciation allowances recapture in respect of buildings or leasehold improvements.
2. Under the Hong Kong tax law, fixed assets used in a trade or business are referred to as capital assets and tax depreciation is allowable but any gain/loss on disposition is nontaxable. This differentiates assets classified as trading in nature as this classification refers to inventory, disposition of which will be taxable.
3. 36 TC 275.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Tax Services Limited, Hong Kong
- • Tracy Ho
+852 2846 9065
Ernst & Young LLP, Hong Kong Desk, New York
- • Connie Chan
+1 212 773 2661
Ernst & Young LLP, Asia Pacific Business Group, New York
- • Chris Finnerty
+1 212 773 7479
- • Jeff Hongo
+1 212 773 6143
- • Kaz Parsch
+1 212 773 7201
- • Bee-Khun Yap
+1 212 773 1816
EYG no. CM4012