Companies incorporated in Malawi are free to reorganize themselves in substance or form but there could be tax implications.
The Taxation Act defines reorganization as; a mere change in a company’s form; a recapitalization of a company; a combination of two or more companies into a single company; a division of a company into two or more companies; acquisition of at least 80% of equity interests in a company in exchange solely for equity interests in the acquiring company; and acquisition of at least 80%, by value, of assets of a company in exchange solely for equity interests in the acquiring company.
For tax purposes, several conditions have to be met for a reorganization to be considered a “qualified reorganization”. In a qualified reorganization, there is a recognition that capital gains tax has arisen but the taxpayer or company is allowed not to pay the tax.
A qualified reorganization means one pursuant to: a written plan; undertaken for valid business reasons; carried out not for tax avoidance; and the company must be incorporated in Malawi. The Commissioner General shall disregard the form of the transaction where the form is inconsistent with the substance of the transaction.
The cost or basis of an asset acquired shall be determined with reference to the adjusted basis of the asset immediately before reorganization. The acquiring company shall take into account the tax attributes of the acquired company unless otherwise provided.
Distribution of equity shares between parties to reorganization shall not be taxable but any other distributions of cash or property shall be considered as a sale. Any reorganization which is not a qualified reorganization shall be treated as a sale of the company and of all of its assets and capital gains tax shall apply.
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