Background
The Inland Revenue Department (IRD), Ministry of Finance, Government of Nepal, has issued an official clarification notice regarding the applicability of “change in control” provisions under Section 57 of the Income Tax Act, 2058 in cases involving Preference Shares.
This clarification addresses long-standing practical confusion among taxpayers and professionals on whether transfer or ownership changes of preference shares trigger tax consequences under the control change rules.
Relevant Legal Framework
1. Income Tax Act, 2058
Section 57 – Restriction on Carry Forward of Losses due to Change in Control
Section 75(1) – Authority of IRD to issue public circulars and clarifications
2. Companies Act, 2063
Section 65(3)(ङ) – Classification of shares and voting rights
3. Nepal Financial Reporting Standards (NFRS)
Classification of
i. Equity instruments (with voting rights), or
ii. Financial liabilities / non-controlling equity, depending on substance
Core Issue Addressed by IRD
Whether change in ownership of Preference Shares constitutes a change in control for the purpose of Section 57 of the Income Tax Act, 2058.
This is critical because Section 57 disallows carry forward of tax losses if there is:
i. A change in ownership, and
ii. A resulting change in control of the entity.
IRD’s Clarification – Key Takeaways
When Preference Share Ownership Change is NOT Considered Change in Control
According to the IRD notice:
Preference shares that are issued only with limited rights, without voting power or without influence over management or decision-making, shall NOT be considered for determining “change in control” under Section 57.
Such preference shares:
i. Are issued subject to specific conditions
ii. Do not affect management control
iii. Do not influence company policy or decision-making
Conclusion:
Ownership changes of such preference shares shall be excluded while
computing ownership change for Section 57 purposes.
When Preference Share Ownership IS Considered Change in Control
If preference shares:
i. Carry voting rights, or
ii. Confer control, influence, or management participation, or
iii. Are structured in substance as controlling equity under Companies Act and NFRS,
Then:
Such preference shares must be included in determining change in ownership and control under Section 57 resulting loss carry forward may be restricted.
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