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A Final Answer on the Tax Treatment of Unrealised Gains

In the recent case of Nice Cheer Investment Limited (NCIL) v. Commissioner of Inland Revenue (CIR) FACV 23/2012 (Nice Cheer), the Court of Final Appeal (CFA) ruled that the increase in the value (i.e. revaluation gain) of trading stocks at the balance sheet date which was recorded as unrealised profits in the income statement should not be assessable to tax in Hong Kong. This upheld the judgments of the Court of First Instance (CFI) and Court of Appeal (CA) in favour of NCIL. This case was heard by the CFA on 16-17 October 2013, and the written judgment was delivered by the CFA on 12 November 2013. The CFA reaffirmed that profits are not taxable until they are realised and profits must not be anticipated. The CFA also concluded that accounts drawn up in accordance with the ordinary principles of commercial accounting must nevertheless be adjusted for tax purposes if they do not conform to the underlying principles of taxation.