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- 5 Marks
Question
The management of Akolo Ltd (Akolo) has been running this business entity for some time now. At a seminar organized for some select businesses at the Trade Fair-Accra last year, the management of Abolo Ltd (Abolo) realized at the seminar that the two companies (Akolo and Abolo) have a lot in common with the same market share. Consequently, the two companies commenced processes to merge as one strong entity. The two agreed on a merger arrangement to benefit from the synergetic efforts.
The two companies intend to form a new entity called Akobolo Ltd (Akobolo).
Required:
i) What is the tax implication of the arrangement if, in the new company-(Akobolo), Akolo intends to hold 40% in the underlying ownership in the assets of the new company while Abolo holds 60%? (3 marks)
ii) What is the tax implication if both companies hold 50% each in the underlying ownership of the assets of the new company – Akobolo? (2 marks)
Answer
i) – Tax Implication of 40% and 60% Ownership:
Under section 47 of Act 2015 (Act 896), the gains on the realization of an asset accruing to or derived by a company arising out of a merger, amalgamation, or reorganization of a company is exempt from tax where there is a continuity of at least fifty percent of the underlying ownership in the asset.
In this arrangement, Akolo has 40% in the underlying ownership in the asset of the new company, which suggests the realization of the assets and consequently, any gains made are subject to tax by adding it to business income and subjecting it to applicable tax rates.
In the case of Abolo, which intends to hold 60% in the underlying ownership in the assets of the new company, any gain from this merger is exempt from tax.
(3 marks)
ii) – Tax Implication of 50% and 50% Ownership:
If both companies hold 50% each in the underlying ownership of the assets of the new company, this constitutes a realization of assets, but the gains on this realization are exempt from tax in both Akolo Ltd and Abolo Ltd.
(2 marks)
- Tags: Business Reorganization, Mergers, Ownership, Tax Exemptions
- Level: Level 3
- Topic: Tax planning
- Series: NOV 2019
- Uploader: Theophilus