Qualified Reorganization
In Malawi, the acquisition of at least eighty percent of the equity interests in a company in exchange solely for equity interests in the acquiring company; and the acquisition of at least eighty percent, by value, of the assets of a company in exchange solely for equity interests in the acquiring company is considered a reorganization. Where this reorganization is pursuant to a written plan, undertaken for valid business purposes, and does not have as its purpose tax avoidance by any party to the reorganization, it is considered a qualified reorganization.
Value of Asset Acquired
In that case, the value or basis of an asset acquired is determined with reference to the adjusted basis of the asset immediately before the reorganization. The adjusted basis in relation to the asset, means the basis of the asset:
- in case of corporate shares, other than additional shares, increased by the amount of any contributions to the capital of the corporation made by the taxpayer who owns such shares.
- In any other case, reduced by the amount of the initial allowance, investment allowance or annual allowance given to the taxpayer in respect of the asset, or increased by the cost of improvements and additions, excluding maintenance or repair costs, made to the asset by the taxpayer.
Valuation by Registered Valuer
The Parties to the reorganization are responsible for providing such valuation. There are no restrictions on who can carry out such a valuation under the Taxation Act. However, under section 131 of the Companies Act 2013, where valuation is required in respect of property, stocks, shares, or securities of a company or its assets, it shall be valued by a registered valuer. Under the Company Regulations, 2017, a registered valuer is a person registered in the gazette and must be a chartered accountant under the Public Accountants and Auditors Act or any other qualifications acceptable to the Registrar. The valuer should have been in practice for 10 years.
Valuation Methods
Under the Taxation Act, the available valuation methods are the book value or open market price. The Taxation Act defines “basis”, in relation to an asset purchased or constructed by the taxpayer to mean the cost of that asset. In the case of any other asset, the open market price (fair market value) of the asset on the date of its acquisition by the taxpayer. Open market price in relation to an asset, means the price which the asset would fetch if sold on the open market at the time of the event in question. The open market value is recommended.
Any reorganization which is not a qualified reorganization is treated as a sale of the company and of all its assets from which any gain is taxable, and any loss is deductible. The gain or loss is calculated as the difference between the total acquisition cost and the tax basis of all assets transferred. The acquisition cost is the price agreed upon between the parties to the reorganization and should be equal to the value of the shares/assets that are surrendered. That value should reflect the fair market value, or it may be subject to correction.
Stamp Duty of Share Transfers
Share transfers are not subject to stamp duty in Malawi. However, during the 2023 budget sitting, the government announced the revocation of the stamp duty exemption notice of 1992, which exempted instruments that constituted a security from stamp duty. The revocation of the notice means that on assenting and coming into force of the amended Stamp Duty Act, stamp duty may now be payable on transfers of securities, including the transfer of shares. For real estate assets, stamp duty is imposed at 1.5% on transfers of immovable properties.
Distribution of equity shares not taxable
Distributions of equity shares in a company which is a party to a qualified reorganization to any shareholder of any company which also is a party to the same qualified reorganization shall not be taxable to the receiving shareholder. In other words, upon acquiring the equity shares or interest in a qualified reorganization, the distribution of those equity shares to any shareholder shall not be taxable to the receiving shareholder. However, any other distributions of cash or other property shall be taxed to the recipient as consideration received in a sale or exchange.
Notification Requirement
Notice should be given to the Commissioner General for Malawi Revenue Authority. To minimize tax leaks, the reorganization must be qualified.