Finance Bill 2081 has introduced one change in Section 57 which we will be discussing in this post.
What changed?
Amendment by Finance Bill 2081 is in bold letters below:
दफा ५७(१) कुनै निकायको विगत तीन वर्ष अघिसम्मको स्वामित्वको तुलनामा पचास प्रतिशत वा सोभन्दा बढी स्वामित्व परिवर्तन भएमा सो निकायले आफ्नो स्वामित्वको सम्पत्ति वा आफूले बहन गरेको दायित्व निःसर्ग गरेको मानिनेछ ।
तर साबिकका शेयरवाला तथा साझेदारको शेयर सङ्ख्या र पुँजी यथावत रही नयाँ शेयरवाला तथा साझेदार थप भई पुँजी वृद्धि भएको अवस्थामा यो उपदफाको व्यवस्था लागू हुने छैन।
Section 57(1): If the ownership of any entity changes by fifty per cent or more as compared to its ownership until before the last three years, the entity shall be deemed to have disposed the property under its ownership or the liability borne by it.
However, this provision shall not apply if the number of shares and capital of the existing shareholders and partners remain unchanged, and new shareholders or partners are added resulting in an increase in capital.
Easier way to understand this
Another way to understand this is – A share transaction will trigger the application of Section 57 if it results in a change of ownership by fifty percent or more compared to its ownership from three years ago. However, this does not apply if the transaction only introduces new shareholders to increase capital without altering the number of shares and capital held by existing shareholders. So, introduction of a new shareholder doesn’t trigger Section 57 even if there is significant change in the ownership of the entity.
Some Examples
Example 1: Company A had three shareholders each owning 33.33% of the company three years ago. Recently, two of the original shareholders sold their shares to new shareholders. The ownership change is more than fifty percent. This transaction triggers Section 57, deeming the company to have disposed of its property or transferred its liabilities.
Example 2: Company B had three shareholders each owning 33.33% of the company three years ago. Recently, the company issued new shares, adding new shareholders but not changing the share number and capital of the original shareholders. Although new shareholders were introduced, the original shareholders’ ownership percentages and capital remain unchanged. This transaction does not trigger Section 57 as it only involves adding new shareholders to increase capital without altering the share number and capital of the existing shareholders.
Does this benefit PEVCs?
Private equity and venture capital firms (PEVCs) often bring about changes in the ownership structure of the companies they invest in, potentially triggering Section 57 if the change amounts to 50% or more of the shareholding. This provision in the tax law mandates a reassessment of the company’s assets at market value upon triggering, subjecting any resulting gains to taxation based on the difference with its existing tax base. This has historically posed a compliance burden for PEVCs investing in companies.
However, this amendment introduced in the Finance Act of 2081 provides an exception to Section 57 for additional investments that do not alter the share units and capital of existing shareholders. This exemption relieves investors from tax frictions associated with Section 57, facilitating investment in companies without such concerns.
There’s a caveat, though. This exception only applies during the investment phase. Upon exit, the situation changes. Exiting typically involves a shift in share units for existing shareholders, including new investors, thereby re-triggering Section 57. However, if the exit occurs through share buyback within three years of the investment, Section 57 does not apply. Interestingly, this exception did not exist before the introduction of the amendment to Section 57(1).
In essence, Section 57 now does not apply when a transaction involves only the introduction of a new shareholder.
The arithmetic behind Section 57 - % change analysis
- Step 1 Load Data: Start by loading a spreadsheet file that contains information about share ownership within the company in a 3 column table format of Date, Shareholder, Share Units
- Step 2 Get these three important key dates:
- transaction_date: The date of the latest share transaction date that you want to analyze if the transaction triggers Section 57 or not.
- establish_date: The date when the company was established.
- last_section_57_date: The date when Section 57 was last applied (if applicable).
- three_years_previous_date: The date three years before the transaction_date
- Step 3 Label Shares
- Each share records are categorized based on their dates:
- Records before the MAX(establish_date, last_section_57_date, three_years_previous_date) are marked as “Balance”
- Records before the transaction_date are marked as “Since”
- Other records are marked as “Others”
- Step 4 Create a Summary Table: Then create a table summarizing the share units for each shareholder showing the total number of shares at different points in time and the changes.
- Step 5 Calculate Percentages: Convert the numbers in the summary table to percentages to show how much each shareholder’s ownership has changed.
Check out this Colab for Section 57 Analysis
Or try this out in the Google Colab here: Section 57 Analysis. I know for sure that its easier if this is done in Excel instead of Python – why let an opportunity to code in python go to waste? : )