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In a recent ruling, the Israeli court addressed claims by the Netanya tax assessor regarding the restructuring of Shalam Packaging Products Group.
The assessor argued that the group’s restructuring was conducted solely to reduce tax liabilities by offsetting business losses against a capital gain from insurance payouts following a fire at one of their plants.
Shalam Packaging Products (1998) Ltd, the parent company, manufactures and markets plastic packaging products.
It owns several subsidiaries, including Shalam Packaging Solutions Ltd., which operated an industrial plant in Yakum.
The parent company acquired 100% of the subsidiary’s shares between 2008 and 2013, during which the subsidiary incurred business losses totaling about ILS 54 million.
In January 2014, the parent company filed a notice of restructuring with the tax assessor, transferring assets to the subsidiary under Section 104A of the Income Tax Ordinance, in exchange for shares allotted to the parent company.
Subsequently, the subsidiary transferred operations from its Yakum plant to the parent company’s plant in Caesarea.
In June 2014, a fire at the Caesarea plant led to insurance payouts totaling ILS 155 million.
The group reported capital gains from these payouts and offset significant business losses against this income.
However, the tax assessor claimed the restructuring was a scheme to improperly reduce tax liabilities, labeling it as an artificial transaction.
The assessor issued a tax assessment charge, disallowing the loss offset.
The assessor also contested the classification of ILS 49 million in capital notes from the subsidiary’s previous owner, Kibbutz Yakum, as perpetual notes.
The assessor argued these were regular liabilities and should be treated as such for tax purposes, requiring the income from debt forgiveness to be offset against the business loss.
The court ruled in favor of Shalam Packaging Products Group, rejecting the tax assessor’s claims on several grounds:
This ruling underscores the importance of commercial substance in tax planning and restructuring activities.
It confirms that tax authorities must consider the genuine business purposes behind transactions, rather than solely focusing on potential tax benefits.
The decision provides clarity on how business losses can be offset against capital gains and reinforces the distinction between legitimate tax planning and artificial transactions.
If you have any queries on this article about this New Israeli Court Ruling on Artificial Transactions, or tax matters in Israel more generally, then please get in touch.
Debentures are a common method for companies to raise debt, but there remains ambiguity regarding the taxation of certain income earned from them.
One such issue is the taxation of the premium received on the redemption of debentures. This ambiguity arises because a taxable transfer under the Income-tax Act, 1961 (IT Act) includes the relinquishment of an asset or the extinguishment of any rights therein.
Taxpayers argue that redemption premiums should be taxed as capital gains since they are payments received upon the extinguishment of a capital asset (i.e., debentures).
However, the term ‘interest’ is broadly defined to include any income earned from borrowed money or incurred debt. Consequently, it may be argued that redemption premiums, being income from a debt instrument, should be taxed as interest income.
Recently, the Mumbai Income Tax Appellate Tribunal (ITAT) in Khushaal C. Thackersey v. Assistant Commissioner of Income-tax adjudicated on this issue, holding that the premium received upon redemption of Non-Convertible Debentures (NCDs) is not capital gains but interest, taxable under the head “income from other sources.”
In this case, the taxpayer, an Indian tax resident, purchased NCDs issued by an Indian company from nationalized banks.
These NCDs offered a 0% interest rate but were redeemable at a premium. Upon maturity, the taxpayer received the face value plus the premium from the company.
The taxpayer computed long-term capital gains by subtracting the cost of acquisition from the maturity proceeds, aiming to benefit from the favorable 20% tax rate (plus surcharge and cess) available for long-term capital gains, compared to interest, which is taxed at rates up to 30% (plus surcharge and cess).
The taxpayer also attempted to claim an exemption on the capital gains earned.
Upon assessment, the tax officer determined that the gain received on redemption of NCDs was interest income, assessable under “income from other sources,” and recomputed the tax liability.
This decision was upheld by the first appellate authority under the IT Act.
The taxpayer appealed to the Mumbai ITAT.
The taxpayer argued that debentures are ‘capital assets’ and their extinguishment constitutes a taxable transfer under the IT Act.
The taxpayer cited precedents where redemption of preference shares and capital investment bonds were considered “transfers” under the IT Act, qualifying for capital gains treatment.
Additionally, the taxpayer referenced Section 50AA, which deems gains from transfer, redemption, or maturity of Market Linked Debentures (MLD) taxable as capital gains, indicating that redemption of debentures constitutes a taxable transfer.
The tax authorities countered that NCDs are debt instruments, and the premium received on redemption is interest income.
They relied on Bennett Coleman & Co. Ltd, where it was held that premium received on redemption of debentures is taxable under “income from other sources.”
The tax authorities also referred to Circular 2/2005, which clarifies that the difference between redemption price and purchase cost of deep discount bonds by intermediate purchasers is taxable as interest or business income.
The Mumbai ITAT ruled in favor of the tax authorities, holding that the premium on redemption of debentures is taxable as interest income. The ITAT observed that the discount on deep discount bonds (DDBs) is similar to the premium paid on the redemption of NCDs, as both are debt instruments, and the discount/premium is determined by applying a specific interest rate.
The ITAT noted that for Market Linked Debentures (MLDs), the interest rate is not determined at issuance, but the return depends on the performance of an underlying market index or instrument, making MLDs materially different from NCDs. Hence, no support could be drawn from Section 50AA in the taxpayer’s argument.
The ITAT further distinguished between debentures and preference shares/capital investment bonds, noting that the latter carry additional rights, such as the right to receive surplus on liquidation, which are absent in debentures. Thus, the cases cited by the taxpayer regarding taxable transfers involving an ‘extinguishment’ were deemed not applicable to the present facts.
The ITAT concluded that the redemption of NCDs at face value by the issuer does not give rise to capital gains but merely constitutes the realization of money advanced by a creditor. Consequently, any premium received is considered interest income.
This ITAT judgment upholds the principle that the premium received on the redemption of NCDs is generally taxable as interest under the head ‘income from other sources.’
However, it is important to note that the judgment dealt with a specific scenario where NCDs were issued at 0% interest in lieu of an outstanding debt obligation.
Other scenarios, such as a buyback of interest-bearing NCDs before maturity, could be treated differently. In such cases, if the investor relinquishes the right to receive future interest for a one-time payment, it might be considered an ‘extinguishment of rights,’ potentially triggering capital gains tax implications.
Therefore, it is crucial to analyze the impact of this ruling based on the specific facts and relevant tax principles of each case.
The ITAT judgment in the Khushaal C. Thackersey case provides valuable clarity on the tax treatment of premium received on NCDs, ruling it as interest income rather than capital gains.
However, the applicability of the principles highlighted will need to be tested against the complexities of individual cases.
If you have any queries on this article on the taxation of premium on redemption of debentures, or Indian tax matters in general, then please get in touch.
On 9 April 2024, the U.S. Treasury Department issued proposed regulations and updated reporting requirements to further elucidate the non-deductible 1% excise tax on stock repurchases by traded corporations.
This tax, part of Section 4501 of the Internal Revenue Code, was originally enacted on 16 August 2022, and impacts most domestic traded corporations as well as domestic subsidiaries of foreign traded corporations.
The regulations build upon earlier guidance provided by Treasury Notice 2023-2, with several revisions affecting the scope and calculation of the tax.
Here’s a breakdown of what’s covered:
The Stock Buyback Tax applies to repurchases by domestic corporations whose stock is traded on established securities markets and includes any related transactions by domestic subsidiaries of foreign traded corporations.
The tax is calculated as 1% of the net total value of stock repurchases within a single tax year, adjusted for certain excluded transactions such as those related to tax-free reorganizations or contributions to retirement plans.
Specific transaction types, including tax-free spin-offs and certain mergers, have nuanced treatments under the tax rules. For instance, transactions involving “boot” (cash or other non-stock consideration) might trigger tax liabilities under certain conditions.
The regulations specify that domestic subsidiaries funding stock repurchases by their foreign parent groups may also be subjected to this tax, clarifying the scope of “funding by any means,” which can include intercompany transactions like loans or distributions.
Traded corporations, both domestic and foreign, should thoroughly review their stock repurchase activities and transactional planning since January 1, 2023, to ascertain potential liabilities under the new guidelines:
All relevant stock repurchases and funding activities must be documented and reported, regardless of whether the tax is owed.
Entities must prepare for compliance with the reporting and payment requirements set to commence with the issuance of final regulations.
For instance, the due date for reporting and paying the tax for 2024 under the proposed rules would be April 30, 2025.
Corporations need to evaluate whether their stock repurchases, including those in special transaction types like LBOs or mergers, might be subject to the tax.
Particularly for foreign traded corporations with U.S. subsidiaries, it’s crucial to consider how cross-border cash flows might be interpreted under the funding rules.
As traded corporations anticipate the finalization of these regulations, proactive review and adjustment of corporate strategies will be essential to navigate the implications of the Stock Buyback Tax.
This includes aligning transactional practices with the new tax landscape and preparing for the necessary administrative compliance by the stipulated deadlines.
This detailed guidance marks a significant step in the Treasury’s efforts to implement the Stock Buyback Tax effectively, providing clarity and direction for impacted corporations navigating this new tax environment.
If you have any queries about the stock buyback tax, or other US tax matters, then please get in touch.
As business owners approach retirement, planning the succession of their business becomes a crucial task.
While third-party sales or Employee Ownership Trusts (EOTs) are common routes, a Management Buyout (MBO) offers an efficient and attractive alternative, particularly when other options are impractical or undesirable.
A Management Buyout (MBO) occurs when a company’s management team collectively acquires a stake in or the entirety of the company. This strategy is often employed when:
MBOs are especially suitable for family businesses where there’s an emotional investment in ensuring the well-being of employees and stakeholders during the succession process.
Opting for an MBO provides several advantages:
Despite its benefits, an MBO carries potential risks:
Several options exist for the management team to finance the exit value:
Tax implications of an MBO can vary significantly based on transaction structure. Key areas to consider include:
Early and expert tax advice is essential to navigate these complexities.
Each MBO is unique and requires tailored advice and direction. Common themes to consider include:
An MBO offers a strategic succession option with several benefits. However, like all successful succession planning, it requires careful planning, expert advice, and thorough due diligence to ensure a smooth and successful transition.
If you have any queries about this article on Management Buyouts (“MBOs”), or other UK tax matters, then please get in touch.
In a move to bolster investment and stimulate economic growth, Uganda’s Minister of Finance, Planning, and Economic Development has announced significant amendments to the nation’s tax laws specifically targeting the private equity (PE) and venture capital (VC) sectors.
The proposed legislative changes, encompassed in the Stamp Duty (Amendment) Bill 2024 and the Income Tax (Amendment) Bill 2024, are designed to exempt income derived from PE and VC funds regulated in Uganda from both income tax and stamp duty.
The urgency of these amendments is underscored by the latest report from the East African Private Equity and Venture Capital Association (EAVCA), which highlights a sharp -53% drop in deal volumes in Uganda for the year 2023.
This slump, attributed to the cyclical nature of the investment industry, marks the most significant downturn in recent years, with impacts reverberating through the economy.
The bill proposes a comprehensive tax exemption for incomes generated from or by PE and VC funds regulated by Uganda’s Capital Markets Authority (CMA).
This exemption extends to gains from the disposal of non-business assets, such as investment interests held by private equity or registered venture capital funds.
The amendment aims to shield these gains from the newly proposed tax rate of five percent, encouraging more robust investment activities within these funds.
Current regulations require the payment of stamp duty on nominal share capital or any increase therein for limited liability companies at a rate of 0.5%.
The new bill, however, seeks to carve out an exception for shares acquired by investors in PE and VC funds regulated by the CMA.
This change means that such transactions will no longer incur stamp duty, significantly reducing the cost of investment and potentially accelerating capital flow into the sector.
These proposed amendments are poised to create a more attractive investment landscape for both local and international investors in Uganda’s burgeoning private equity and venture capital markets.
By alleviating the tax burdens associated with investment in these funds, Uganda is signaling its commitment to fostering an environment conducive to entrepreneurial growth and innovation.
However, the language of the bills has sparked discussions regarding their applicability. Questions remain about whether the exemptions will apply exclusively to VC and PE funds licensed under the CMA Act and those operating as limited liability companies.
The treatment of foreign investors and funds operating as partnerships or trusts also remains unspecified, pointing to potential areas for clarification as the bills progress through the legislative process.
As Uganda takes these bold steps to reform its tax policy framework in favor of private equity and venture capital investments, the global and regional investors are watching closely.
These changes could significantly enhance Uganda’s appeal as a destination for investment capital, particularly in sectors poised for growth and innovation.
Stakeholders are encouraged to engage with the legislative process to ensure that the final regulations provide clarity and foster an equitable investment environment.
If you have any queries about this article on Uganda Proposes Private Equity Tax Changes, or Ugandan tax matters more generally, then please get in touch.
The Spanish General Directorate of Taxes (GDT) has recently issued a binding ruling.
The ruling clarifies the exemption from Corporate Income Tax for the transfer of shares in entities that have obtained the necessary permits for commencing their activities – even if they have not yet materialised their operations.
This decision marks a change in the approach taken by the GDT. Of course, it will also have significant implications for businesses involved in such transactions.
The ruling by the GDT centers around a consulting entity (A) that held a 100% stake in another entity (S) engaged in online gaming licenses.
Although entity (S) had not commenced its economic activity, it had acquired all the required administrative licenses, incurring substantial expenses in the process.
The value of these licenses exceeded 50% of entity (S)’s asset value. Entity (A) intended to transfer its entire shareholding in entity (S) to an unrelated entity.
The GDT was asked to confirm whether the tax exemption under Article 21.3 of the Corporate Income Tax Law applied to the positive income generated from this transfer.
The GDT concluded that as long as entity (S) had organized itself, either independently or using its own or third-party resources, for the purpose of engaging in the production or distribution of goods or services, entity (A) could avail the exemption under Article 21 of the Corporate Income Tax Law.
This ruling reference is CV 0863/23.
This ruling signifies a departure from a previous binding ruling, CV 2265/21, issued by the GDT in 2021.
In that ruling, the GDT had held that the transfer of 100% shares in an entity that owned land undergoing permit processing for the installation of a solar plant was not exempt from Corporate Income Tax, as the economic activity had not materially commenced.
However, it is worth mentioning that the tax authorities of Navarra had already deviated from this approach, deciding in a similar case that the exemption should indeed apply.
The recent ruling by the GDT is a positive development for businesses seeking clarity on the Corporate Income Tax exemption. It brings reassurance and aligns with the correct interpretation of the law.
Nevertheless, it is crucial to evaluate each case individually, considering the specific circumstances and ensuring proper declaration of all economic activities performed up until the point of the share transfer.
The Spanish General Directorate of Taxes has taken a significant step in clarifying the application of the Corporate Income Tax exemption in these circumstances.
Theruling marks a departure from a previous stance and provides much-needed clarity for businesses engaging in such transactions.
As always, careful consideration of each case’s particulars is essential to ensure compliance with tax regulations.
If you have any queries about corporate income tax on transfer of shares or Spanish tax matters in general, then please do get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.
Draft legislation has been approved by Thailand’s cabinet paving the way for the introduction of a Financial Transactions Tax (“FTT”).
The tax will apply to securities traded on the Stock Exchange of Thailand (“SET”).
This does away with a tax exemption that has been in place for over three decades.
Assuming that it ultimately finds its way onto the statute book, it is envisaged that it will apply to transactions starting from April 2023.
As alluded to above, the sale of securities through SET has been exempt from specific business tax since the end of 1991. The rationale was that this would stimulate trading on the secondary market and providing a shot in the arm for the domestic economy.
The FTT essentially acts to repeal this exemption. It is an indirect, transactional tax imposed on income from the gross receipts from share disposals.
Broadly speaking it will be those that are selling securities who will be liable for FTT.
However, the draft law also requires brokers to withhold FTT from the share sales income and to pay these amounts to the Revenue on behalf of the seller.
It is anticipated that the new FTT tax will be introduced in two phases.
These phases are as follows:
| Which phase? | Rate of FTT (inc local tax) | Expected date of commencement |
| Phase one | 0.055% x gross income from share disposals | With effect from April 2023 |
| Phase two | 0.11% x gross income from share disposals | With effect from January 2024 |
The FTT will apply to the following:
Some persons are specifically exempted.
If you have any queries relating to the new Thailand Financial Transactions Tax or tax matters in Thailand more generally, then please do not hesitate to get in touch.
The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article