In Nice Cheer Investment Limited v CIR, FACV 23/2012, the Commissioner of Inland Revenue (the Commissioner) lost his appeal to the Court of Final Appeal, whereby the Court found that unrealised gains recognised at year-end are not taxable. The Court clearly found that unrealised profits are not chargeable to tax, notwithstanding that they have been recognised in the taxpayer’s financial statements in accordance with international accounting standards.
The decision of the Court of Final Appeal, the highest court in Hong Kong, that a taxpayer cannot be assessed on unrealised profits, regardless of the accounting treatment adopted, should now be taken as a fundamental principle of Hong Kong taxation law. Anticipated or imputed profits must first be realised before they are subject to tax.
Source: KPMG - Tax alert issue 18 – November 2013