URA loses Bank bonus share suit

Hillary Nsambu – Newvision 30.11.11

Commercial bank bonus shares are not and cannot be deemed to be dividends, Commercial Court tells URA

 

The Commercial Court has stopped the Uganda Revenue Authority (URA) from levying tax on commercial banks bonus shares.

Justice Geoffrey Kiryabwire, the head of the court, ruled on Monday that bonus shares were not and cannot be deemed to be dividends that attract withholding tax.

“I hereby declare that the issuance of bonus shares does not in substance amount to a distribution of accumulated profits of the company for such a transaction to impose a withholding tax,” the judge declared.

 

The ruling followed a suit in which eight commercial banks sought to prevent URA from imposing tax on their bonus shares.

Oscar Kambona of Kampala Associated Advocates represented the bankers that sued under the Uganda Bankers Association (UBA), while Ali Ssekatawa  represented URA.

The banks included Standard Chartered Bank, Centenary, Baroda, Bank of Africa, Diamond Trust and the National Bank of Commerce. Others are Orient Bank and Cairo International.  The judge agreed with Kambona that the bonus shares do not amount to a distribution of accumulated profits of the company to attract withholding tax.

“Whereas it is true that the issuance of bonus shares results in an increase of shares owned by a shareholder in the company, the value of the shareholdings in the company does not change, “ the lawyer submitted.

The judge agreed, saying the bonus shares were simply a move to raise capital to meet the new statutory requirements.  He said it would be unfortunate if this type of balance sheet restructuring would be subjected to income tax.

“After all, the overall balance sheet does not change and even dividends on the adjusted shares could not be guaranteed until the banks make profits and declare dividends, “ Kiryabwire stated.

 

He disagreed with Ssekatawa, who had argued that bonus shares were an asset provided to the shareholders in the form of additional shares, as a result of which the shareholder’s asset base is enhanced.

Under the new law, commercial banks are required to build up their minimum paid up share capital to the tune of shs. 10b by March 2011 and shs. 25b by March 2013.

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