(1) to Set up a Subsidiary in Hong Kong (Company X) to Carry out the Following Activities

Case 8

BBB Ltd is a company incorporated in Hong Kong in 1970. It carries on a manufacturing business in Hong Kong since then. It owns a piece of land in Kwun Tong, and it constructed a factory to manufacture electronic products in 1971. In June 2012, the company considered to move its manufacturing arm to Dongguan in 2013. The plan would be as follows:

(1) to set up a subsidiary in Hong Kong (Company X) to carry out the following activities:  To take over the manufacturing machines from BBB Ltd,  To arrange with a Mainland entity for contract processing or import processing for manufacturing goods in the Mainland (and this depends on the type of arrangement granted by the Mainland authority),  To provide manufacturing machines for the use of the Mainland entity,  To provide supervisory staff for the Mainland entity to ensure the quality of goods produced by the Mainland entity. (2) to sell the factory with the land to another wholly owned Hong Kong subsidiary (Company Y) at market price and construct a commercial block for sale, or (3) to demolish the factory and construct a commercial block for sale.

In order to provide for the payment of redundancy payment for the transfer of manufacturing arm to Dongguan, BBB Ltd will provide a sum of $10,000,000 in the accounts for the year ended 31 December 2012, and the actual payment will be made in 2013.

CCC Ltd is the holding company of BBB Ltd, and is considering to restructure and reorganize the activities of the subsidiaries. There will be transfers of properties and shares between the subsidiaries. It also take this opportunity to standardize the accounting dates of the group companies to 31 December.

Required:

(a) Explain the profits tax implications for the contract processing and import processing and the depreciation allowance available to Company X. (b) Explain tax implications for the sale of the factory and the land to Company Y. (c) Explain profits tax implications for the demolition of the factory and the construction of a new commercial block for sale by BBB Ltd. (d) Explain the profits tax treatment for the provision of redundancy payment in the year ended 31 December 2012 and the actual payment of redundancy payment in the year ended 31 December 2013, and the salaries tax treatment for redundancy

1 payment received by the staff of BBB Ltd. (e) Explain the tax implications that the company has to be aware of the group restructuring process.