05 May 2015
Hi, I would seek an opinion on transfer from Pvt. ltd. company to LLP. where it is a matter of procedure to do the same, I have a question on the implication on profits lying in reserves in pvt. ltd. company before conversion?
for e.g. if there are profits to the tune of say 10 lac lying in reserves of company, if it is distributed as dividend it will attract DDT. after conversion to LLP whether LLP can distribute that 10 lac to partners and if yes what would be the tax implication?
Thanks in advance for your valuable time and advice.
05 May 2015
Thanks Miteshbhai, but my question is how to utilise that money lying in reserves as accumulated profits? As i know as per 47(xiiib) of income tax, partners cannot utilise the reserves for a period of 3 years after conversion, in a way it benefits partners directly or indirectly. if so what after 3 years, can they distribute the reserves among partners with not tax liability??
10 August 2024
When converting a Private Limited Company (Pvt Ltd) to a Limited Liability Partnership (LLP), handling the accumulated reserves and profits involves careful planning and understanding of tax implications. Here's a detailed analysis based on your queries:
### **1. Procedure for Conversion from Pvt Ltd to LLP**
1. **Approval and Documentation:** - Obtain approval from the Board of Directors and shareholders of the Pvt Ltd company. - File an application for conversion with the Registrar of Companies (RoC) in the prescribed format (Form 18 and Form 14).
2. **Valuation and Agreement:** - Conduct a valuation of assets and liabilities. - Draft and execute a partnership deed specifying the terms of conversion.
3. **Clearance from Tax Authorities:** - Obtain a no-objection certificate or clearance from the Income Tax Department and any other relevant authorities.
4. **File Necessary Forms:** - File the necessary forms with the RoC for conversion. - Obtain a certificate of conversion from the RoC.
5. **Transfer of Assets and Liabilities:** - Transfer assets, liabilities, and reserves from the Pvt Ltd company to the LLP as per the scheme of arrangement.
### **2. Tax Implications on Reserves and Profits**
**a. Distribution of Profits Before Conversion:** - **Dividend Distribution Tax (DDT):** If the Pvt Ltd company distributes the reserves as dividends before conversion, it will attract DDT as per the provisions of the Income Tax Act (which was applicable before the introduction of dividend taxation under the Finance Act 2020).
**b. Conversion to LLP:** - **Section 47(xiiib) of the Income Tax Act:** This section provides for tax neutrality on the conversion of a Pvt Ltd company into an LLP, provided certain conditions are met. Under this section, the accumulated profits in reserves are not taxed at the time of conversion.
- **Utilization of Reserves Post-Conversion:** - **Restriction:** The LLP cannot directly utilize the reserves or accumulated profits of the Pvt Ltd company for three years following the conversion. This restriction aims to prevent the direct or indirect benefit of these reserves to the partners of the LLP.
- **After Three Years:** After the three-year period, the LLP may distribute the reserves among its partners without any additional tax liability, provided the conditions under Section 47(xiiib) are met and no other tax liabilities or regulatory compliance issues exist.
### **3. Distribution of Reserves After Conversion**
**a. During the Three-Year Restriction Period:** - The LLP cannot distribute the reserves directly to the partners. These reserves must be retained in the LLP and used for its business purposes.
**b. After the Three-Year Period:** - **No Tax Liability on Distribution:** Once the three-year restriction period expires, the LLP can distribute the accumulated reserves to the partners. This distribution is not subject to additional tax, as the reserves have already been taxed in the Pvt Ltd company.
### **Summary**
- **Conversion Procedure:** Follow the regulatory procedures for converting a Pvt Ltd company to an LLP, ensuring compliance with legal and tax requirements. - **Tax Implications:** - Distributing reserves as dividends before conversion incurs DDT. - Under Section 47(xiiib), the conversion is tax-neutral, but reserves cannot be distributed to partners for three years. - After three years, the LLP can distribute reserves to partners without additional tax liability.
### **Action Steps**
1. **Plan Conversion:** Consult with legal and tax advisors to ensure compliance with conversion procedures and regulations. 2. **Handle Reserves:** Consider the timing of reserves distribution and the impact of the three-year restriction on your business strategy.
Proper planning and compliance with legal requirements are crucial for a smooth transition from a Pvt Ltd company to an LLP, especially in managing accumulated profits and reserves.
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