The most common transactions performed by companies involving capital gains tax are:
• Issue of shares or debentures;
• Distribution in specie (in kind) by company;
• Capitalisation issues; and
• Resident trusts and CGT
Let's go into each of these in more detail
Issue of shares or debentures
If your company issues shares or debentures to a company in exchange for cash or kind, it won't create a disposal for capital gain tax purposes. It doesn't matter if it's at a premium or not. (Paragraph 11(2)(b) of the Fourth Schedule of the ITA)
By debenture we mean an unsecured debt instrument issued by a company, backed by a general credit or the creditworthiness of a company, rather than by specific assets.
Capital Gains Tax: Further implications CGT consequences of distributing an asset in kind
If your company issues shares or debentures to a company in exchange for cash or kind, it won't create a disposal for capital gain tax purposes. It doesn't matter if it's at a premium or not. (Paragraph 11(2)(b) of the Fourth Schedule of the ITA).
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Distribution in specie (in kind) by company
If you distribute an asset in kind to a shareholder, the following capital gains tax
• For your company: There's a deemed disposal of the asset by your company at market value on the date of the distribution, which means your company will pay capital gains tax
on the positive difference between the market value of the asset and its base cost; and
• For the shareholder: The base cost of the asset received in the distribution is considered to be the market value of the asset
Use this tip: The distribution of an ordinary cash dividend doesn't trigger capital gains tax
consequences, because withholding tax on dividends at 15% is payable on the net amount of the dividend declared by your company.
Keep in mind that you must be clear that the distribution of an asset is considered 'in kind' as opposed to in cash. Even if it's a dividend for normal tax purposes, it'll result in a capital gain if the market value of the asset exceeds its base cost.
In other words, in case your company declares a dividend, and withholding tax is payable on the dividend, but you distribute the asset instead of a cash settlement, capital gains tax
is payable on the disposal of the asset. So it doesn't matter if the dividend was taxed.
This means that where your company issues capitalisation shares, the shareholder is treated as having acquired those shares for Rnil. However, you should know that if the capitalisation issue constitutes a dividend, the base cost of the shares is equal to the amount of the dividend.
Note that by capitalisation issues we mean the cases when companies convert accumulated reserves into share capital, and said share capital is given to shareholders in place of cash dividends