By Wanagwa Hara | Partner
Corporate restructuring (hereinafter referred to as ‘reorganization’) happen for wide range of commercial reasons, such as effecting a takeover, a merger, demerger, resolving a shareholder dispute, succession planning or restructuring a group to maximize efficiency and savings. Tax implications cannot be ignored in undertaking a reorganization as it a business cost. In our global economy, cross border reorganization such as cross border mergers and acquisitions are also undertaken and a satisfactory tax regime that minimizes double taxation is important. Our corporate reorganization tax team works with local and foreign companies as well as shareholders and portfolio investors in corporate reorganizations. We analyze and evaluate tax issues and provide efficient reorganization options. We set out below the general tax legal framework for corporate reorganizations in Malawi.
Reorganization in Tax
Malawi’s Taxation Act defines a reorganization means a mere change in a company’s form; a recapitalization of a company; a combination of two or more companies into a single company; a division of a company into two or more companies; the acquisition of at least eighty per cent of the equity interests in a company in exchange solely for equity interests in the acquiring company; and the acquisition of at least eighty per cent, by value, of the assets of a company in exchange solely for equity interests in the acquiring company.
Qualified Reorganization/ Tax Free Reorganization
A qualified reorganization means a reorganization that meets the above criteria. Above all, it is pursuant to a written plan undertaken for valid business purpose and which does not have as its purpose tax avoidance by any person who is a party to the reorganization. In short, it is pre-conditioned on the existence of a bona fide commercial or business purpose and the absence of tax avoidance.
The Role of the Commissioner General for MRA
In determining whether a transaction is a qualified reorganization, the Commissioner General is mandated to disregard the form of the transaction where the form is inconsistent with the substance of the transaction.
There are a number of key tax issues that impact on reorganizations in general and qualified reorganizations in particular as set out below.
Recognition of Capital gains or losses
A capital gain is the excess of the amount realized on the disposal of an asset over its basis or adjusted basis. A capital loss is the excess of the basis or adjusted basis of an asset over the amount realized on its disposal. Under Malawi’s Taxation Act, where the reorganization is qualified no capital gain or loss is recognized. The acquiring company shall take into account or assume the tax attributes of the acquired company unless otherwise provided.
To clarify, when undertaking a qualified reorganization, no gain or loss would be recognized both on the corporate and shareholder level and the basis of the assets or stocks transferred would be carried over. In this way, a qualified reorganization ensures continuity of business enterprise and continuity of shareholder interest. It is for this reason that qualified reorganizations are fondly known as tax free reorganizations.
The Objective and Principle of Tax Neutrality
The objective is not to grant a tax exemption to the corporations or shareholders involved, but rather to neutralize the tax consequences of the reorganization. The reorganization therefore involves neither a tax advantage nor a tax disadvantage. This is a principle of tax neutrality in corporate reorganization. It implies that no tax is levied at the time of the reorganization and after the reorganization, the taxable profits of the transferee company and its shareholders are calculated on the basis of tax elements that were present in the transferor company and its shares immediately before the reorganization. The principle is one of deferral of tax on unrealized gains that exist at the time of the reorganization, not exemption of tax on these gains.
Basis of Asset Acquired
The valuation basis of asset acquired in a reorganization shall be determined with reference to the adjusted basis of the asset immediately before reorganization.
Non-Taxable distribution of equity shares
Distribution of equity shares between parties to reorganization shall not be taxable.
Distribution of Cash or other Property
However, any other distributions of cash or other property shall be taxable in the hands of the recipient as consideration received in a sale or exchange.
Treatment of non-qualified Reorganizations/Restructurings
Any reorganization which is not qualified shall be treated as a sale of the company and all its assets. Any gain is taxable and any loss is deductible. The amount of gain or loss is calculated in accordance with the applicable tax rules
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