Question Tag: Shareholding

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  • 10 Marks

AT – May 2021 – L3 – Q5b – Mergers, amalgamation and reorganisation

Advise on the tax implications of Japan Rocks acquiring 60% of shares in Konadu Yiadom Ltd.

The shareholders of Japan Rocks, a computer chip manufacturing company based in Japan, are planning on acquiring 60% of the shares in Konadu Yiadom Ltd in Ghana. The return on income for Konadu Yiadom Ltd for the year ended 31 December 2020 showed a loss of GH¢3,600,000 and the financial cost of GH¢900,000.

Required:
Advise Japan Rocks and its shareholders on the income tax implications of the acquisition of shares by Japan Rocks and the treatment of financial cost.

Income Tax Implications of the Share Acquisition:
The acquisition of 60% of the shares in Konadu Yiadom Ltd by Japan Rocks will trigger several tax implications:

  1. Change in Underlying Ownership:
    Under section 62 of the Income Tax Act, 2015 (Act 896), a change in underlying ownership of more than 50% results in the following:

    • Deemed Realisation of Assets and Liabilities:
      The assets and liabilities of Konadu Yiadom Ltd will be treated as though they were realised immediately before the change in ownership. This may lead to the recognition of gains or losses, which would be subject to tax.
  2. Disallowance of Loss Carryforward:
    Konadu Yiadom Ltd’s prior losses of GH¢3,600,000 cannot be carried forward after the change in ownership. This means that Japan Rocks will not benefit from the pre-existing tax losses. The loss incurred before the acquisition is not deductible under section 62(2)(b) of the Income Tax Act.
  3. Disallowance of Financial Cost:
    The financial cost of GH¢900,000 incurred by Konadu Yiadom Ltd prior to the acquisition will not be deductible after the change in ownership. According to section 16(3) of the Income Tax Act, the financial cost incurred before the change in underlying ownership cannot be deducted by the new owners.
  4. Separate Year of Assessment:
    Due to the significant change in ownership, the year before and after the acquisition will be treated as separate years of assessment for tax purposes. Konadu Yiadom Ltd will be required to file two separate tax returns: one for the period before the acquisition and another for the period after.
  5. Potential Tax on Gains:
    If there is any revaluation of assets during the acquisition process, any gains on these assets may be subject to corporate income tax, depending on the nature of the transaction (e.g., asset purchase vs. share purchase). However, the acquisition structured as a share purchase would typically avoid capital gains tax in Ghana.

Conclusion:
The acquisition of 60% of Konadu Yiadom Ltd by Japan Rocks brings about critical tax implications, particularly the disallowance of the pre-existing loss and financial cost incurred before the acquisition. Japan Rocks should carefully consider the tax impact of the transaction and ensure compliance with Ghana’s Income Tax Act.

  • 10 Marks

BCL – Dec2022 – Q4b – Alternative forms and constitutions of business organisations

Discuss the requirements for incorporating a company and the implications of unpaid shares.

Lucy Kondomire and Adele Amaney have been engaged in the formation of a private company limited by shares to engage in a curtain business. They are very eager to win a contract to supply the new Parliament House with 3,000 yards of curtains as part of a planned refurbishment of the Chamber of Parliament. They are optimistic of being awarded the contract in view of the President’s campaign to promote locally produced and manufactured goods. They have already proposed the name of the company to be “Nyamenehene Curtains Plaza.” The company is to be registered with 1,000,000 ordinary shares of no-par value and fully subscribed 600,000 and 400,000 shares respectively. In view of this, they have approached you as a Consultant to take over the process of incorporating their company as quickly as possible to enable them to win the contract. They have expressed their desire to pay any fee possible if the process is completed within five days.

Required:
i) State EIGHT (8) requirements for the incorporation of a company to Lucy Kondomire and Adele Amaney. (6 marks)
ii) If it turned out later that Adele Amaney did not pay fully for the shares she subscribed to, and have not been issued with a share certificate, what would be the implication of this occurrence? (4 marks)

i) Requirements for Incorporation:
Section 13 of the Companies Act, 2019 (Act 992) outlines the requirements for incorporating a company in Ghana. The eight key requirements include:

  1. Company Name: The name of the company as proposed (e.g., “Nyamenehene Curtains Plaza”).
  2. Type of Company: Indication of the type of company (e.g., private company limited by shares).
  3. Nature of Business: The nature of the proposed business (e.g., curtain manufacturing and supply).
  4. Registered Office: Address of the proposed registered office and principal place of business in Ghana.
  5. Details of Subscribers: Particulars of each subscriber, including full name, date and place of birth, residential address, occupation, and nationality.
  6. Details of Directors: Particulars of each proposed director, including full name, former names, residential address, occupation, and other directorships held.
  7. Statutory Declaration: A statutory declaration by each proposed director indicating that they have not been convicted of fraud or dishonesty, and have not been declared insolvent.
  8. Shareholding: The amount of proposed stated capital, number of authorized shares, and subscription details (e.g., 1,000,000 ordinary shares with 600,000 and 400,000 shares fully subscribed).

ii) Implications of Unpaid Shares:
If Adele Amaney did not fully pay for the shares she subscribed to and has not been issued with a share certificate, she would not have the status of a shareholder/member. This would imply that she does not have the rights associated with shareholding, such as voting rights, entitlement to dividends, or the ability to transfer shares. Furthermore, she may not be recognized as a legal member of the company until full payment is made and the share certificate is issued. This could affect her ability to influence company decisions and participate in the company’s management.

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