Standard Chartered Bank and Others v Commissioner General Uganda Revenue Authority (HCT - 00 - CC - CS - 63 - 2011)
Observed later treatment
No later-treatment classification is recorded for this judgment.
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Holding
The High Court held that the issuance of bonus shares does not constitute a distribution of accumulated profits within the meaning of Section 2(W)(V) of the Income Tax Act and therefore does not attract withholding tax under Section 118. Bonus shares represent a capitalisation of reserves that converts undistributed profits into share capital which cannot be returned to members by way of dividend. While bonus shares are property from which future income may be derived, they are not themselves a dividend unless unambiguously provided for in the taxing statute. The court rejected the argument that the recapitalisation scheme was tax avoidance, finding it to be lawful balance sheet restructuring to meet statutory capital requirements.
Outcome
Declaration granted in favour of the plaintiff banks that bonus shares do not attract withholding tax; injunction refused as unnecessary
Facts
Seven commercial banks operating in Uganda brought suit jointly as members of the Uganda Bankers Association seeking declaratory relief on the tax treatment of bonus shares. The Bank of Uganda directed all commercial banks to increase their minimum paid-up capital to UGX 10 billion by 1 March 2011 and UGX 25 billion by 1 March 2013. The banks considered capitalising retained reserves through issuing bonus shares to existing shareholders as part of their capital restoration plan. On 20 December 2010, the Uganda Bankers Association wrote to the Commissioner General requesting a private ruling on whether issuing bonus shares would attract withholding tax. The banks contended that issuing bonus shares does not transfer assets to shareholders and therefore is not a distribution of profits within Section 2(W)(V) of the Income Tax Act. The Commissioner General disagreed, taking the view that bonus shares issued from reserves constitute a distribution of dividends because the reserves are assets with ascertained value in the company's books, giving shareholders an enduring entitlement to dividends.
Issues
- Whether the issuance of bonus shares amounts to a distribution of accumulated profits of a company within the meaning of Section 2(W)(V) of the Income Tax Act so as to attract withholding tax under Section 118.
- Whether the issuance of bonus shares is in substance a distribution of profits by the banks to its shareholders.
- Whether on close scrutiny the issuance of bonus shares from retained/undistributed profits constitutes a tax avoidance scheme.
- Whether the withholding tax provisions apply to the issuance of bonus shares.
Orders
- Declaration granted that the issuance of bonus shares does not in substance amount to a distribution of accumulated profits of the company in terms of Section 2(W)(V) of the Income Tax Act or at all for such a transaction to impose a withholding tax obligation on the banks under Section 118.
- Prayer for permanent injunction declined.
- Each party to bear its own costs.
Rules and key headnotes
Legislation cited (8)
Cases cited (7)
- Inland Revenue Commissioners v Fisher's Executors [1926] AC 395
- Inland Revenue Commissioners V Bloth [1921] 2
- Stanbic Bank (U) Ltd & 7 Others v The Uganda Revenue Authority (HCCS 792 of 2006 and 170 of 2007)
- Russell v Scott [1948] 2 All ER 1
- Swan Brewery case (supra)
- Commissioner of Income Tax, Bihar v Dalmia Investments [1964] AIR 1464
- WT Ramsay Ltd v IRC [1981] 1 All ER 865
Full judgment
The original judgment as reported. Read the original PDF before relying on any passage.