Shareholders’ continuity test
The shareholders’ continuity test holds that the same shareholders must hold at least 50% of the company’s total shares as at both the relevant dates. If the test was not fulfilled, the losses would be dismissed permanently unless a waiver to fulfil the test is obtained from IRAS.
E.g. A company wishes to claim its unutilised losses brought forward from the year of assessment of 2005. (The basis period is year end 30th of September 2004) against the assessable income for year of assessment of 2014.
Number of sharesShareholders31 Dec 200431 Dec 20051 Jan 2014Shareholder W201515Shareholder X5055–Shareholder Y303035Shareholder Z––50Total:100100100
The relevant dates will be the last day of the year in which the losses incurred and the first day of the Year of Assessment (YA) in which losses are to be deducted.
Therefore the two relevant dates will be: 31.12.2004 and 01.01.2014. As it can be seen above the common Shareholders at the two relevant dates are Shareholder W and Shareholder Y. Both Shareholders hold at least 50% of the company’s total shares as per the two relevant dates. Since the Shareholder’s continuity test has been fulfilled the losses will be allowed to be utilised until YA 2015.
The Comptroller normally requires the company to furnish a certificate from its external auditors to confirm that there is no substantial change in its ultimate shareholders on the relevant dates.
If a company with unabsorbed losses is a subsidiary, where the shares of a company are held by or on behalf of another company, the share will be deemed held by the shareholders of the latest company. IRAS views that a trace should be made all the way back to the ultimate shareholdings of the loss company.
If the shares are held by or on behalf of the trustee of the estate of a deceased shareholder or on behalf of the beneficiary, the shares are deemed held by the shareholder under section 23(7)(c).
Lastly, for the purpose of the application, any part of a share of a shareholder that is not fully paid up is disregarded. The part to be disregarded is the unpaid amount of the share dividend by the total amount payable in respect of the share.
Number of sharesShareholders31 Dec 200431 Dec 20051 Jan 2014Shareholder W201510Shareholder X5555–Shareholder Y253020Shareholder Z––70Total:100100100
Therefore the two relevant dates will be 31.12.2004 and 01.01.2014. As it can be seen in the above the common shareholders as at the two relevant dates are Shareholder W and Shareholder Y. Both the shareholders hold lesser than 50% of the company’s total shares as at the two relevant dates. Shareholder W holds only 30% and Shareholder Y holds about 45%. Since the shareholder’s continuity test has not been fulfilled the losses will not be allowed to be utilised in year of assessment in 2015.
Nevertheless, if there is a substantial change and the change was not to derive any tax benefit, the company can apply to the Comptroller for a waiver of the “Shareholders Continuity Test” under Section 23(5) and 37(15).
The IRAS has clarified that the following situations does not give rise to deriving any tax benefit:
a) Nationalisation or privatisation of a government-owned enterprise.
b) Normal trading of shares of the company of the company or shares of its holding company on a recognised stock exchange and;
c) Change carried out for genuine commercial reasons and not tax-motivated, e.g. as part of a company rescue package.
When a waiver is granted, the company can deduct unabsorbed losses against the gains or profits derived from the same trade or business in respect of which they arose. This is to prevent companies from shifting profitable activities to loss-making concerns taken over for the primary purpose of avoiding tax.
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