In the earlier article on ‘How business losses can reduce your tax liability in three ways.’ (26 July 2021), any unutilised trade losses, capital allowances and donations to be use against any chargeable income is subject to passing the substantial shareholders’ test. Essentially, the shareholders between 2 relevant dates would need to be substantially the same. Any change in shareholders resulting in more than 50% change in the shareholding of the company will imply a failure in this test. The first relevant date for a loss carried forward will be the first day of YA that the loss or CA is to be deducted while the second relevant date will be the last day of the year in which the losses or donations were incurred or the last day of the year of assessment in which the capital allowances were claimed. For losses carried back, the relevant dates however will be different, it will be the first day of the year (or YA) in which the losses or donations were incurred (or capital allowances were given) and the last day of the immediate preceding YA in which the business losses or capital allowances are to be deducted.
Once the 2 relevant dates are determined, the list of shareholders between these two dates would need to be compared to ensure any change in shareholders will not breach the 50% threshold. The easiest way to conduct this test is to sum up the total shareholdings of shareholders that remain common in the each of the relevant dates. As long as the total shareholdings is 50% or more in each of these two dates, there will not be a substantial change.
Date 1 A: 25%, B: 10%, C: 30%, D: 35%
Date 2 A: 35%, B: nil, C: nil, D: 15%, E: 50%
Common shareholders in 2 relevant dates: A, D
Shareholding of common shareholders in the relevant dates: Date 1: 60%, Date 2: 50%
Since the shareholdings for common shareholders is > 50%, there is no substantial change in shareholders.
In the event that the Substantial Shareholding Test is not satisfied, companies may apply for a waiver of the Substantial Shareholding Test. The company would then need to provide explanation to the satisfaction of the Comptroller that the substantial change in shareholders was tax motivated. It is therefore important that any change in shareholders is properly documented and executed with Board resolutions and minutes of meeting together with any business or restructuring plan outlining the commercial reasons. A good governance and document retention process will go a long way in reducing grief in any tax filing.