Question Tag: Deemed Dividend

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  • 8 Marks

PT – Dec 2023 – L2 – Q4a – Corporate Tax Liabilities

Explanation of the tax implications of transferring retained earnings to share capital, including deemed dividend tax and stamp duty.

A Nigerian investor (Niger Ltd) in Ghana has the following information relating to its business:

Year Revaluation Reserves (GH¢) Share Capital (GH¢) Retained Earnings (GH¢)
2021 250,000 1,000,000 1,200,000
2020 100,000 600,000 1,350,000

Required:
With relevant computations, comment on the tax implication of the transfer from Retained Earnings to Share Capital. (8 marks)

The transfer of GH¢150,000 from the Retained Earnings account to the Share Capital account is treated as a “deemed dividend”. This triggers the following tax implications:

  1. Deemed Dividend Tax: A tax rate of 8% is applied to the transfer amount.
    Calculation: GH¢150,000 x 8% = GH¢12,000
  2. Stamp Duty: A stamp duty of 0.5% is applicable on the transfer.
    Calculation: GH¢150,000 x 0.5% = GH¢750

Total tax payable: GH¢12,000 (Deemed Dividend Tax) + GH¢750 (Stamp Duty) = GH¢12,750

  • 5 Marks

PT – Nov 2021 – L2 – Q1a – Income Tax Liabilities

Assess the tax payable on a capital transfer from retained earnings to stated capital based on the details provided.

Kawukudi Ltd intends to increase its capital requirement. Therefore, it applied to the Registrar General with the following:

Retained Earnings Account (GHȼ)

  • Balance b/fwd: 100,000
  • Transfer from income statement: 1,200,000
  • Transfer to stated capital: (600,000)
  • Balance c/fwd: 700,000

Required:
Assess with explanation the tax payable under this circumstance.

The transfer of GH¢600,000 as income from the income surplus account to the stated capital is referred to as ‘deemed dividend’. This implies that a tax at the rate of 8% shall be imposed on the transfer. Thus, 600,000 X 8% = GH¢48,000.
There will also be a stamp duty payment of 0.5%. Thus, 0.5% x 600,000 = GH¢3,000.

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