At a Glance
- Under Section 62(1) of Act 896, if a company’s underlying ownership changes by more than 50% within a three-year period, its assets and liabilities are deemed realised at market value.
- Following this deemed realisation, Section 62(2) strips the company of its ability to carry forward tax attributes, such as financial costs and previous losses.
- Because Ghana does not allow companies to transfer tax losses to associates, extinguishing these attributes penalises businesses without providing a corresponding anti-abuse benefit.
- The current rules create severe compliance burdens for companies with publicly traded shares and trigger double taxation during direct share sales.
Introduction
Ghana’s income tax Act contains three special provisions that deal with the implications of changing the underlying ownership of a company. One of these provisions applies to every company while the other two concern mining and petroleum companies. In this article we explain what the provision for all companies means. We also examine how needless some of the implications are to Ghana.
What is the underlying ownership of an entity?
Section 133 of Act 896 defines the underlying ownership of an entity to mean
membership interests owned in the entity, directly or indirectly through one or more interposed entities, by individuals or by entities in which no person has a membership interest
Act 896 is also helpful in defining “membership interest”. It says
“membership interest” in an entity means a right, whether of a legal or equitable nature, and is in the nature of a contingent right to participate in income or capital of the entity, the interest of a partner in a partnership, the interest of a beneficiary in a trust and shares in a company.
For our purposes, membership interest of a company is simply the shares in a company. With this understanding, the underlying ownership of a company refers to the shares owned in the Ghanaian company whether directly or indirectly by an individual or an entity in which no person has any shares or interest. So, the underlying owner must be a human being in most cases. If it is an entity, that entity must not have issued shares to anyone and no one has equity in that entity. An example of such an entity is a company limited by guarantee. For such a company, any dividend it receives remains with it since by law, it cannot pass the dividend to another entity by declaring its own dividend.
If a Ghanaian company is owned by another company, we must trace the underlying owner through all the companies with shares until we arrive at the individual whom no one “owns”. Same thing will be done if the end-point person is an entity which no one owns. The essence of there being no owner of the final person is such that if dividends are paid, the final person has no legal obligation to transfer that dividend to another person.
From the illustration above, in scenario A, Kofi is the underlying owner of the company resident in Ghana. He owns all the shares directly and so he is the ultimate owner of the company. In Scenario B, no human being directly owns the company in Ghana. Here too, Kofi is the underlying owner because he owns all the entities in the chain. When we trace the human beings behind the company in Ghana, we will go through both Parent 1 and Parent 2 and end up with Kofi. In scenario C, both Kofi and Ama are the underlying owners, Kofi owns 40% of the company in Ghana while Ama owns 60%.
What happens when the underlying owners change?
Now, let’s focus on what Act 896 says must happen if the underlying owners change. Section 62(1) of Act 896 says:
Where the underlying ownership of an entity changes by more than fifty percent at any time within a period of three years, the assets and liabilities of that entity immediately before the change is deemed to be realised.
The law is saying that if within any three-year period, the shares held by individuals ultimately owning the Ghanaian company change by more than 50%, all the assets and liabilities of the Ghanaian company are deemed to be realised. Obviously, once there is a realisation, we must determine whether there is a gain or loss for the necessary taxes to be paid. The law provides that the Ghanaian company is treated as realising its net assets at market value. So, the consideration received is deemed to be the market value of the company’s net assets. This market value is compared to the cost, and any difference is treated as a gain or loss. If it is a gain, taxes are paid on it.
Additionally, since the Ghanaian company does not actually sell anything, the law assigns this same market value to the net assets as if the Ghanaian company has freshly acquired them. This whole exercise is simply to revalue the assets and liabilities of the Ghanaian company and tax any revaluation gain. This is what experts call “step-up”. The existing costs of the net assets are being stepped up by the gain that was taxed. This is not the end.
After the revaluation exercise, the law strips the Ghanaian company of some tax attributes. Section 62(2) says:
An entity that changes ownership in the manner referred to in subsection (1), shall not
(a) deduct financial costs carried forward under section 16(3) that were incurred by the entity before the change;
(b) deduct a loss under section 17(1) that was incurred by the entity before the change;
(c) claim a deduction under section 23 (2), (4) or (5) after the change, in a case where the entity has included an amount in calculating income under those provisions before the change; or
(d) carry back a loss under section 24(6) that was incurred after the change to a year of assessment before the change.
Act 896 won’t allow the Ghanaian company whose underlying ownership has changed by more than 50% in a manner described above to carry some tax attributes forward. These attributes include financial costs and tax losses. We submit that this is a mistake.
Why there is no need to strip the Ghanaian company of tax attributes
In some jurisdictions, it makes perfect sense why if the existing underlying owners sell their interest and new owners have come on board, tax attributes must be lost. This is because, in those tax systems, their laws allow for the transfer of those tax attributes to associates. Essentially, within a group of companies resident in a country, one entity’s tax loss can be transferred to another entity that is making profit for them to use to reduce their taxable income.
This ability to transfer tax losses creates opportunities for arbitrage, where a profit-making group can acquire a loss-making entity simply to use its past tax losses. To prevent this abuse, these tax systems strip the company of these transferrable tax attributes once the underlying owners have significantly changed. So, any new underlying owner cannot rely on the tax losses of the target company. The revaluation exercise also refreshes the company’s tax books as if it were a new company.
The UK’s Corporation Tax Act, 2010 demonstrates this system. Part 5 of the Act provides for “Group Relief”, where an entity within a Group can surrender its tax losses to another entity in the same Group. When there is a change in ownership, the UK restricts the transferability of these tax losses. You can find these rules in Part 14 of the UK’s Corporation Tax Act, 2010.
Ghana’s Act 896 does not allow any company or business to transfer its tax losses. Even if two companies are under common ownership, there is no ability for one entity’s tax losses to be surrendered for the relief of the Group. If so, why then does Ghana extinguish tax losses of a company that has new underlying owners? What arbitrage is Ghana trying to prevent?
The answers to these questions can be found in the template Ghana used to draft Act 896. It’s no secret that Ghana’s Act 896 is based on the IMF staff’s working papers relating to template laws. This is a common template that countries use as a first draft. In that template, there is the ability to transfer tax losses to associates. Consequently, to prevent this arbitrage of acquiring a loss-making company for its losses to be transferred, the template extinguishes the losses when the underlying ownership changes by more than 50%. Paragraph 281 of the commentary to the template law explains the rationale for extinguishing these tax attributes. It says:
Sections 33(1)(c) … permit, in limited circumstances, the direct transfer of tax attributes to and from entities … [T]his is essentially an issue of looking through the form in which a business or investment is held and looking to economic substance. Section 171 is of an opposite nature in seeking to prevent an indirect transfer of tax attributes of an entity to persons who do not own or are not commonly owned with the entity. A provision of this nature is recommended in order to prevent tax arbitrage irrespective of whether the corresponding provisions are implemented to permit the direct transfer of entity tax attributes. Section 171(1) prevents the carry forward of tax attributes under the transactional basis income tax. It treats an entity as realising all its assets and liabilities where there is a change of 50 percent or more in the underlying ownership of the entity within a three-year period. This level of underlying ownership is consistent with that required for the direct transfer of tax attributes to associates. Section 90… will apply a market value rule to the realisation. The result is that the entity will realise any previously unrealised gains and losses just before the change. This, combined with section 171(2), prevents the purchaser of an entity indirectly obtaining access to these tax attributes.
It is worth mentioning that some of these change-in-ownership rules existed before Act 896 came into force. Section 54 of the repealed Internal Revenue Act, 2000 (Act 592) provided that an entity was not allowed to deduct any loss incurred before the 50% change in its ownership. Act 592 did not require any mandatory revaluation.
You will note from the commentary above that it is recommended to strip the tax losses even if there is no ability to transfer losses or tax attributes to an associate. This means, an investor seeking to invest in Ghana cannot take the accumulated tax losses as any incentive for justify its capital injection. As a country focusing on investment attraction, this is one of the quick fixes to implement. This blanket rule needs to be replaced with a more targeted restriction.
Ghana does not benefit from the revaluation
As explained above, an excess of the market values of the assets and liabilities over their costs is a revaluation gain that is to be taxed. After this tax, the books of the Ghanaian company are restated using the market values. In practice, it is usually the fixed assets that require revaluation, since the cost will be the tax written down values and the market value will depend on the condition of the asset.
So, any gain from the revaluation of the fixed assets is taxed. However, these revalued amounts are eligible for capital allowance deduction. That is, the company can recover the gain it was taxed on through capital allowance. That means while the tax authority will receive immediate taxes from the revaluation, these taxes can be clawed back through lower future tax payments caused by increased capital allowance.
For a profitable business that is a tax-paying position, it can recover the full tax it paid. However, if the business is making losses, but ends up paying taxes on the revaluation gain, it may be unable to recover this gain. This is because the increment in the capital allowance will lead to an increase in the loss amount, which may end up expiring after five years.
Let’s assume the underlying ownership changes on 31st December 2025. The tax written down value on theta date is GHS150,000 and the market value for the assets is GHS180,000. This means there is a gain of GHS30,000 to be taxed. From 1 January 2026, the new value of the fixed assets will be GHS180,000 (market value). Capital allowance will be calculated on the gain of GHS30,000.
Reporting the change
Act 896 requires the resident company to split its accounting year into two. The first part will deal with chargeable income before the change while the other part deals with income after the change. So, for a year, two separate computations are required. This is necessary to ensure the correct balances are carried forward to the period after the change or are properly extinguished.
Reforms needed
This provision, in its current form, is sometimes difficult to implement. Since at every point in time, the Ghanaian company must know all the individuals ultimately owning it, what happens when the shares of any of the parent companies are publicly traded. That means, it must keep track of all trades on whatever stock exchange just to identify whether the individuals have changed. Countries like Tanzania and Uganda have recognised this problem and created an exception so that this provision will not apply to publicly traded shares.
Another problem with this provision is that it applies even when there is a direct sale of the shares of the Ghanaian company. In a direct sale, the shareholder that is exiting is taxed on any gain it derives from the sale. After the shareholder is taxed, the resident company is also taxed on the revaluation gain. One single transaction has consequences on two different taxpayers. It is necessary for another exception to be created such that there is no requirement for revaluation if the shareholder is taxed. Again, in Tanzania, if the change in underlying ownership is caused solely by transfer of shares to a resident person, this provision does not apply.
To attract investment where tax losses are incentives, the rules need to change to allow losses to be preserved for any new underlying owner. Stricter rules can be introduced such as requiring the resident company to continue the same business it was in before the change until the loses before the change are exhausted or expire. Some countries require the continuation of the same business for specified number of years else the losses and other attributes are forfeited. This ensures that the new owner does not acquire a loss-making entity, change its business and benefit from the losses before the acquisition.
Conclusion
Ghana’s current change-in-ownership rules enforce a rigid penalty, extinguishing a company’s tax attributes and forcing a deemed realisation of assets. Because Ghana does not permit the transfer of tax losses between associated entities, stripping these attributes fails to prevent any actual tax arbitrage. Instead, the provision simply creates severe operational hurdles, demanding impossible tracking for publicly traded companies and triggering punitive double taxation during direct share transfers. To foster a more equitable and functional corporate tax regime, lawmakers should look to regional peers like Tanzania and Uganda. Introducing targeted exemptions for publicly traded shares and taxed direct sales would eliminate these unintended problems, ensuring the tax law facilitates rather than stifles legitimate business restructuring.
