Hi all,
I have a client, a UK limited private company (ABC Ltd), which has 4 individual shareholders. ABC Ltd has no assets other than a 20% investment in a foreign private company (XYZ Ltd). This has been shown as 'Investment in XYZ Ltd' on the Balance Sheet.
The shareholders of ABC Ltd wish to exchange / demerge the 'Investment in XYZ Ltd' from ABC Ltd to the 4 individual shareholders. Understand will need to Cr - Investment in XYZ Ltd but not sure where the debit entry goes? Will it Dr - Loss of Investment through the P&L?
Also, I presume this will not attract any taxation implications within the company, ABC Ltd?
Many thanks
Replies (13)
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Do you mean that they want to liquidate the company and distribute its only asset in specie to its shareholders?
If so, I am not aware of any reason why the company’s disposal of its asset won’t be deemed to take place at market value for tax purposes.
Your question about journal entries is irrelevant. By the time the transaction has taken place the company will no longer exist and won’t need its extinction accounting for.
You should focus on the tax implications for the company and its shareholders, rather than on journal entries.
So what is the transaction contemplated then? How do the shareholders acquire ownership of the company’s asset if not by a distribution in specie on the liquidation of the company?
There’s not enough information given but there’s no need to liquidate a company to effect a distribution in specie
Yes of course, but it will cost more in tax to do it without liquidating the company won't it? And if the company is to remain a dormant shell, there is no point in it continuing to exist.
Not necessarily, John. It depends on information that we don't have - lots of it.
There are plenty of reasons to keep a dormant company alive (just as there are plenty of reasons to get rid of it) - perhaps they just like the name?
It could be either depending on how it is structured. As I said above, not nearly enough information provided.
It could be both, presumably, though normally one knocks out the other. It's certainly not neither, so John's advice to think about the tax is sound.
Indeed - one or the other, or both. And yes tax is usually the key consideration in such matters.
If it’s an income distribution, yes.
If it’s a capital distribution on a liquidation, see my first post about the irrelevance of journal entries in those circumstances.