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TAX TREATMENT OF PREVIOUS LOSSES AFTER MERGER OR DEMERGER
Josephine Peng
In a ruling dated 13 August 2003, the Ministry of Finance announced the following:
When a merger qualifies for offsetting the losses incurred in the five years prior to the merger against subsequent taxable income, the loss suffered by the dissolving company when filing its final tax return for the current fiscal year in accordance with Article 75 of the In-come Tax Act, if assessed by the competent tax collection authorities, may be deducted from the net profits of the surviving or newly incorporated company over the five years following the year in which the loss was in-curred, in an amount to be calculated accord-ing to the proportional shareholding of the dissolving company's shareholders in the post-merger company.
When a company demerger qualifies under Paragraph 3, Article 38 of the Corporate Mergers and Acquisitions Act for offsetting the losses incurred in the five years prior to the demerger against subsequent taxable income, the loss suffered by the dissolving company when filing its final tax return for the current
fiscal year in accordance with Article 75 of the Income Tax Act, if assessed by the competent tax collection authorities, may then be de-ducted from the net profits of the newly in-corporated or post-demerger surviving com-pany over the five years following the year in which the loss was incurred, in an amount to be calculated according to the proportion of share capital spun off in the demerger and the proportion of shares held by the dissolving company's shareholders in the newly incor-porated or post-demerger surviving company.
