Raymond Yeung Tax Consultant former Assessor of Inland Revenue Department 前稅局評稅主任楊輝洪

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Anti-avoidance provision --- Section 61B

Section 61B of Inland Revenue Ordinance is to counteract avoidance of tax through purchase and sale of loss companies. See the following example.

A company ABC Ltd. has been making large profits for many years. To avoid profits tax, it paid $10,000 to buy all the shares of a dormant company which had no valuable assets but accumulated tax losses of $5,000,000. Then, it changed the name of this dormant company to, say ABC & Co. Ltd., one like its own name, and then injected its own business into the new company. After setting-off all the losses with its own business profits, it had the dormant company wound-up so that all its assets (bank balances) were distributed to ABC as dividends on liquidation. The dividends on liquidation are not taxable under Section 17. The cost of liquidation was $10,000. By so doing, it avoided to pay tax on $5,000,000 profits ($5,000,000 * 16.5% = $825,000), with a total cost of $20,000, thus giving a net tax saving of $805,000.  

To deter taxpayers from doing that, Section 61B empowers the Commissioner of Inland Revenue to deny the loss set-off if she is satisfied that the sole or dominant purpose of the change in shareholding of a company was to avoid tax. In such case, the new company ABC & Co. Ltd. has to pay tax on the business profits injected.

 

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