Share this content
13

Equity Investment being Demerged

Didn't find your answer?

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)

Please login or register to join the discussion.

By johngroganjga
01st Jul 2020 20:31

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.

Thanks (0)
Replying to johngroganjga:
avatar
By tannaroo
01st Jul 2020 21:51

johngroganjga wrote:

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.

No the company (ABC Ltd) will continue as a shell/dormant company. I believe its fairly safe to assume that the market value of XYZ Ltd is lower than the original cost of the investment.

Thanks (0)
Replying to tannaroo:
By johngroganjga
01st Jul 2020 22:52

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?

Thanks (0)
Replying to johngroganjga:
Psycho
By Wilson Philips
01st Jul 2020 22:57

There’s not enough information given but there’s no need to liquidate a company to effect a distribution in specie

Thanks (0)
Replying to Wilson Philips:
By johngroganjga
02nd Jul 2020 08:45

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.

Thanks (0)
Replying to johngroganjga:
Psycho
By Wilson Philips
02nd Jul 2020 09:05

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?

Thanks (0)
Psycho
By Wilson Philips
01st Jul 2020 22:51

It’s a distribution to the company’s members.

Thanks (0)
Replying to Wilson Philips:
avatar
By tannaroo
02nd Jul 2020 06:09

Wilson Philips wrote:

It’s a distribution to the company’s members.

So does this mean, its a dividend so taxable to the shareholders or is it a capital distribution resulting in a capital gain?

Thanks (0)
Replying to tannaroo:
Psycho
By Wilson Philips
02nd Jul 2020 06:47

It could be either depending on how it is structured. As I said above, not nearly enough information provided.

Thanks (0)
Replying to Wilson Philips:
avatar
By Tax Dragon
02nd Jul 2020 07:31

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.

Thanks (0)
Replying to Tax Dragon:
Psycho
By Wilson Philips
02nd Jul 2020 07:34

Indeed - one or the other, or both. And yes tax is usually the key consideration in such matters.

Thanks (0)
avatar
By tannaroo
02nd Jul 2020 08:45

ok will have to look into the tax side.
what would be the debit journal entry - would it go through the P&L as "Dividends Paid"?

Thanks (0)
Replying to tannaroo:
By johngroganjga
02nd Jul 2020 09:02

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.

Thanks (0)
Share this content

Related posts