Conversion of Company into LLP

Conversion of Company into Limited Liability Partnership (LLP) – Amendment to Finance Bill 2010

Background:-The Finance Bill 2010, introduced provisions for conversion of private companies / unlisted companies into LLP along with conditions for tax neutrality of such conversions. One of the conditions for tax neutrality is that the total sales, turnover or gross receipts in any of the three years preceding the conversion does not exceed INR 6 mn. Consequential amendments were also made to various sections in the Income-tax Act 1961 (ITA).

Amendment to the Finance Bill 2010

• The following amendments are made to the Finance Bill 2010:

-         The transfer of a share or shares held in a company by a shareholder will be exempt in the hands of the shareholder at the time of conversion of private companies / unlisted companies into LLP if all the specified conditions are satisfied.

-         The tax exemption will be withdrawn where any of the specified conditions are breached and consequentially gains shall be taxable in the hands of shareholders of the predecessor company.

-         The cost of acquisition of the asset in the hands of the shareholder shall be deemed to be the cost of acquisition to him of the share or shares in the company immediately before its conversion into LLP.

Conclusion:-The amendment now seeks to provide exemption to the shareholder of the company for the exchange of shares in lieu of the partnership interest for conversions that meet the stipulated conditions. As highlighted earlier the exemption to the shareholder is not available if the specified conditions, including the sales/turnover/gross criteria are not satisfied. This would therefore create a hurdle for conversions of companies with turnover greater than INR 6 mn.