Other Company Tax Issues

Gift of Money by a Company
Any company can, when working out its taxable income, deduct the amount of any gifts of money that it has made to any society, institution, organisation, trust or fund which has charitable or benevolent purposes and is listed in tax law under section KC5(1).

The maximum deduction that can be allowed in respect of the total gifts made must not exceed 5% of the company’s net income and that income is calculated by taking the gross income less all allowable deductions, but excluding the deduction for the actual gifts.

Associated Persons and Control
In some situations, if the parties to a transaction are in a close relationship with each other they are deemed to be associated persons. If the parties concerned are not dealing on an arms length basis, the IRD can bring about determinations or a ruling which will help to combat any tax avoidance or minimisation that is designed by the parties.

A company is deemed to be under the control of the persons if:

  • The aggregate of the direct voting interest in the company exceeds 50%.
  • Where at the time a market value circumstance exists in respect of the company the aggregate of the direct market value interest in the company exceeds 50%.
  • Where the persons have the control of the company by other means.

Individuals are regarded as relatives for tax purposes if they are connected by a blood relationship, marriage or adoption, as set out by the tax law.

To work out the degree of relationship, the IRD will follow the procedure of counting the steps back to a common ancestor and then the steps forward to the other person. If there are no more than four steps the persons are treated as within the fourth degree of relationship and therefore as relatives for tax purposes.

A person is a relative of a trust if that person’s relative has benefited or is eligible to benefit under the trust. The identities of the beneficiaries of the trust are relevant, therefore, when applying the test.

What are Dividends?
A dividend is deemed to be gross income received by a shareholder. The shareholder who has been deemed to derive the dividend must return the dividend in his/her annual gross income when the tax return is filed.

The term ‘dividend’ has wide meaning. The following items will be treated as a dividend or non-cash dividend for tax purposes:

  • Any cash distribution.
  • Any loans to shareholders which are forgiven, released, or become unenforceable.
  • Any disposable property to a shareholder for less than its true market value.
  • Any property acquired from a shareholder for more than the correct market value.
  • Any property made available to a shareholder for a consideration that is less than the market value.
  • Any taxable bonus issue.
  • Any return or reduction of capital.
  • Any interest on certain convertible notes.
  • Distribution from unit trust.
  • Non-deductible expenditure by a close company.
  • Any of the above transactions with a party that is associated with a shareholder of the company.
  • Any cash or notional distribution of a statutory producer board.
  • Non-cash payments made to a non-executive director shareholder.
  • Certain payments from non-designated group investment funds.
  • Excessive remuneration for services by a shareholder or a director.
  • Excessive rebates by a mutual association.

If the dividend is received by a company, then any imputation credits attached to them can be applied by the company for offset against its own income tax liability for the year. It will also be credited to the company’s imputation credit account.