Global

Details

  • Service: Tax, International Corporate Tax, Global Compliance Management Services
  • Type: Regulatory update
  • Date: 6/27/2012

Hong Kong - Unrealized, marked-to-market security gains not taxable profits  

June 27: Hong Kong’s Court of Appeal held that unrealized gains—i.e., reported with respect to the taxpayer’s securities trades in its year-end profit and loss account—are not subject to Hong Kong’s profits tax. Nice Cheer Investment Ltd. v. CIR, CACV 135-2011 (19 June 2012)

Summary

The taxpayer recorded net unrealized gains in its profit and loss (P&L) account in respect of trading securities held at year-end.


The unrealised gains were based on changes in the “fair value” (i.e., quoted market price) of the trading securities held at year-end. However, for tax purposes, in computing assessable profits, the taxpayer treated the unrealized gains as non-taxable amounts, and instead claimed a tax deduction for the unrealised losses.


The Inland Revenue Department asserted that the unrealized gains were taxable in the year they were recognized in the P&L account.


Hong Kong’s Court of First Instance disagreed with the tax authorities, and instead held that unrealized gains arising from the mark-to-market revaluation of securities held as of the balance sheet date (with gains being credited to the taxpayer’s P&L account in accordance with ordinary accounting principles) were not subject to / chargeable to profits tax.


See TaxNewsFlash-Asia Pacific: Hong Kong - Court holds unrealized gains on mark-to-market revaluation of securities not subject to profits tax


The Court of Appeal in June 2012 affirmed, concluding that unrealized gains from trading investments held at year-end are not taxable because such gains are not realized profits.


Read a June 2012 report [PDF 108 KB] prepared by the KPMG member firm in Hong Kong:

Court of Appeal upholds decision of the Court of First Instance that unrealised gains are not chargeable to profits tax



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