Question

CJA Ltd is resident company engaged in Real Estates Business. As part of efforts to diversify its operations, it plans to acquire interest in Don-Bill Ltd, another resident company. At the last AGM held on 4th March, 2019, some shareholders were of the view that CJA should acquire 15% of the shares in Don-Bill. The Managing Director of CJA was of the view that the Company should rather invest and acquire 25% shares to give it enormous influence in Don-Bill Ltd. Your firm has been identified to give professional advice on the two proposals to help in decision making. Required What is the tax implication on the two proposals and which proposal will you advise CJA Ltd to adopt to leverage on the tax benefits?

Answer 1

Answer:

Investment in a company definitely gives the acquirer some benefits when profits are received. Beyond the benefits in terms of profits, there is room for tax planning when a resident company acquires another resident company. In the case of CJA ltd-a real estate company investing in Don-bill Ltd, there are paybacks when dividend is paid in future as it will be an income.

Tax Provision

a dividend paid to a resident company by another resident company is exempt from tax where the company that received the dividend controls indirectly or directly, at least twenty-five percent of the voting power of the Company which paid the dividend.

Tax implication:

The suggestion of shareholders:

The shareholders interest in the investment of 15% will reinforce to the benefit of CJA ltd when dividend is paid in future. Future dividend will be subject to dividend tax at the rate of 8%.

For paybacks to CJA Ltd, it is judicious and aids tax planning to acquire at least 25% as proposed by the Managing Director of CJA Ltd to stimulus on the tax benefits.

The acquirement of 25% in Don-bill will advantage the Company as any dividend that may be earned in future will not be subject to tax as it is exempt from tax. Both withholding tax and corporate tax will not be applicable to such future dividends