Unrealised Profits Arising from Revaluation

Recent legal case held on non-taxable for unrealised profits of listed securities
In Nice Cheer Investment Limited v Commissioner of Inland Revenue, 1 the taxpayer acquired listed
securities as its trading stock. Some of those listed securities have not been sold and appreciated in value.
The change in value was recorded as profits in the taxpayer?s financial statements according to prevailing
accounting standards, SSAP 24 and HKAS 39.
The Court examined the true and proper construction on the terms ?profits? and ?assessable profits? and
adopted the meaning of real profits arising out of actual trading, professional or business activities between
the taxpayer and another party in Hong Kong. This means that in the case of a taxpayer carrying on a
trade, the trading activity means buying or selling of commodities including listed securities or provision of
services in a commercial transaction for reward. The profits to be chargeable to profits tax should be the
real profits, in the sense that they have been earned, ascertained or accrued, regardless if they have been
received in cash. Book or notional profits arising out of revaluation of trading stock were not real profits as
they did not arise in or were derived from actual trading transactions. Clearly, these unrealised profits were
outside the intendment of section 14(1) and should not be chargeable to profits tax.
In the circumstances, companies might need to prepare two sets of accounts: one for its shareholders
showing the real value of the companies as at balance sheet date in accordance with accounting
standards SSAP 24 and HKAS 39; and the other one is for tax purposes showing the real profits
chargeable to profits tax or losses (in which the unrealised profits arising from revaluation of listed
securities in accordance with SSAP 24 and HKAS 39 are excluded from computation of profits tax.)
1. HCIA 8/2007; Hon To J in Court; 28 June 2011

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