Sec.57: Change in Control

 

As per sec 57 of the Income Tax Act, 2058,

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.

2) If the ownership of an entity is changed as mentioned in Subsection (1), the entity shall not be allowed to carry out the following acts after such change:-

a) To deduct interest incurred by that entity prior to the change in ownership and carried forward pursuant to Sub-section (3) of Section 14,

b) To deduct the loss suffered by that entity prior to the change in ownership, pursuant to Section 20,

c) To carry back a loss suffered after the change in ownership in any income year before such change, pursuant to Sub-section (4) of Section 20, Section 59 or 60,

d) To make adjustment pursuant to Sub-section (4) of Section 24, in cases where it has been calculated for any amount or expenses pursuant to clause (a) of Sub-section (4) of Section 24 prior to the change in ownership, and correction has been made on that amount or expenses pursuant to clause (b) of Subsection (4) of Section 24 after the change in ownership,

e) To make adjustment pursuant to Sub-section (4) of Section 24, in cases where it has been calculated for any amount or expenses pursuant to clause (a) of Sub-section (4) of Section 24 prior to the change in ownership, and correction has been made on that amount or expenses pursuant to clause (b) of Subsection (4) of Section 24 after the change in ownership,

f) To subtract, pursuant to Section 36, the loss suffered in disposing any property or liability prior to the change in ownership from the income earned from the disposal of the property or liability after the change in ownership,

g) In cases where premium has been calculated pursuant to sub-clause (1) of clause (b) of Subsection (4) of Section 60, prior to the change in ownership and such premium has been returned to the insured after the change in ownership, to claim for credit accordingly, or

h) To carry forward in the forthcoming year the tax paid in respect of a foreign income prior to the change in ownership, pursuant to Section 71.

3) In cases where the ownership of any entity changes in any manner mentioned in Sub-section (1) in any income year, the parts before and after the change in ownership in that income year shall be treated as separate income years.

 

 

Practical Implication of Change in Control:

Filing details in www.ird.gov.np in relation to change in control:

When there is a change in control as per sec.57 given above, person should file the change in control in the portal of ird just like the income tax return as given below:

Dual Tax Period in an Income Year:

The period before and after the change in control should be treated as the separate income year as per sec. 57(3) of Income Tax Act. Hence a person should file the income tax return which is to be filed after the completion of the fiscal year and also the change in control up to the date when the ownership changes.

Note:

1.     The change in control should always be filed and verified before filing the D-03 return. Otherwise it would create a hassle to change if D-03 is verified before verifying the change in control. There is a way of filing the return manually and submit to the respective tax officer if such thing happens.

2.     The assets and liabilities of the entity is to be disposed at the market value of the date when the ownership changes.

3.     The owner before the change in control is responsible to pay the taxes for the transactions till the date of such changes. It also includes the taxes on gain on the disposal of assets and liabilities. The new management is responsible for the payment of taxes and filing the D-03 return as well after the changes.

4.     The financials shall also be prepared up to the date of change in control and submitted to the respected tax office physically along with the return filed. It is not mandatory to get audited the financial statements up to the change in control.

5.     It is also good to be on a safer side by filing the Annex 13 of return after taking confirmations from the parties transacted with.