All capitalisations are not distribution

All capitalisations are not distribution

In almost all practical cases, almost all of us get confused with corporate instuments and tax instruments. This confusion is widely spread regarding component of capital in taxation and in corporate laws. This misguides us for characterization of distribution.

According to Sec. 53, all the payments received from beneficiary in any form into an entity is 'Capital contribution'. Therefore, capital contribution includes at least, paid up equity capital, adjusting calls  in arrears; pre-call up contribution; preference capital; security premium, premium on further issue or primary issue, etc.

Intra-group transaction is a serious transaction for corporate purpose. However, intra-group transaction is NOT a transaction for tax purpose. For example, transfering application money to allotment meney to paid up capital is a serious compliance for corporate law and corporate accounting, but nothing for tax accounting. Similarly, capitalisation of security premium issuing bonus shares is a serious compliance for corporate law and corporate accounting, but there is no taxation accounting for this transaction too. 

In the otherhand, profit for the tax accounting has wider coverage as it includes, at least; accumulated profit, statutory reserves, funds, reserves, earmarked reserves, locked reserves, restricted reserves, surplus, provisions(except limited banking and general insurance provisions), etc.

Intra-group transaction within profit has no tax impact, because taxation characterize above all items as single head of 'profit'. Therefore, in case provisions transfered into accumulated reserves, there is no tax impact. Liquidating any of the fund has no tax impacts. 

Transfering 'Profit' to 'Capital contribution' is 'capitalisation of profit' for the purpose of Section 53, and hence, it is distribution.

Bhava Nath Dahal

Bhava Nath  Bhava Nath

About me

Bhava Nath Dahal is a renowned tax consultant and trainer in Nepal and the author of the bestselling tax book titled, “Income Tax and Value Added Tax.” Mr. Dahal was felicitated by Nepal Government in 2016 for his outstanding contribution to the public through tax education. Mr. Dahal is highly regarded for his understanding of Nepalese tax and has provided opinion on complex tax issues for all key industries in Nepal.

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