Hong Kong: Proposed changes to tax treatment of amalgamations and filing of returns

Hong Kong: Tax treatment of amalgamations

The Legislative Council Panel on Financial Affairs on 4 January 2021 released its discussion paper on the proposed amendments to the taxation of amalgamation of companies and filing of electronic tax returns.


Special tax treatment for qualifying court-free amalgamations and a new rule on the transfer of specified assets without sale have been proposed.

Draft legislation of the proposed measures is expected to be introduced in March or April 2021.


Since the introduction of simplified procedures for company amalgamations in the revised Companies Ordinance in 2014, the tax consequences of amalgamations have been an area of controversy.  A view held by many, and which had been applied in a number of amalgamations prior to the new ordinance, is that an amalgamation takes place through universal succession, such that the surviving entity inherits all the historic attributes of the amalgamating entity, including its tax positions.  This would mean that capital allowances, losses, and other tax attributes of both companies would be available for use in the continuing entity.

The Inland Revenue Department (IRD) has taken a different view, published as guidance on its website.  The tax authority argued that the amalgamating company ceases to exist on the day immediately before the amalgamation, resulting in a realization of trading stock at open market value.  Although the IRD has allowed the succeeding entity to continue to claim capital allowances, it has argued that the amalgamating entity’s losses cannot be used by the succeeding entity and imposed restrictions on the use of the pre-amalgamation losses of the succeeding entity.

Future legislation anticipated

The possible future legislation would provide some clarity, and apparently would be broadly consistent with the non-legislative framework previously set out by the IRD, to allow amalgamating companies in a qualifying amalgamation to make an election for continuity of tax treatment pre- and post-amalgamation.  This would include the losses of both entities, although there could be restrictions and anti-avoidance clauses such that losses would only be available to the extent they arose while both companies were in the same 100% group, when the companies conduct the same trade and the amalgamated company has sufficient financial resources.  In its application of its guidance to date, the IRD has taken a very narrow view of what constitutes the same trade, and this may be an argument that continues after the introduction of the new law.

The bill would introduce a new rule that when specified assets are transferred without a sale, other than as part of a qualifying amalgamation or as a result of a person’s death, they would be deemed to be disposed of at market value for tax purposes.

The discussion paper suggests a qualifying amalgamation would be one conducted under Division 3 of Part 13 of the Companies Ordinance.  Thus, it is not yet clear whether foreign companies conducting business in Hong Kong would qualify for the amalgamation provisions or whether any such amalgamations would automatically be caught by the deeming provisions. Further details are expected to be provided in the bill. 

Filing of tax returns

The other principal focus of the paper is a push to increase the number of tax returns filed electronically.  The discussion paper announces that electronic filing would be optional and that the Legislative Council would be consulted prior to any decision to make it compulsory.  

The IRD also proposes to allow service providers to file returns on behalf of taxpayers and to introduce a range of penalties for service providers who fail to meet their obligations in this regard (a penalty in addition to any penalties imposed on the taxpayer).

For more information, contact KPMG’s Global Head of International Tax:

Rodney Lawrence | +1 (312) 665 5137 | rlawrence@kpmg.com

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