Companies

Equity in race to avoid capital gains tax on transfers

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Equity Bank chief executive James Mwangi at a past function in Nairobi. PHOTO | FILE

Equity Bank is racing to complete the sale of its stake in mortgage firm Housing Finance (HF) and the transfer of its business to a holding company by end of the year to avoid paying billions of shillings in capital gains tax.

The tax, set to become applicable beginning January 1, could scuttle the HF deal, the bank’s chairman has warned.

The urgency to beat the tax date emerged Monday when Equity held an extraordinary general meeting (EGM) in Nairobi seeking shareholders’ sanction to create a holding company to oversee all the subsidiary’s operations.

Gains made on the transfer of property and shares will attract a tax of five per cent, making the two transactions by Equity Bank subject to a potentially huge tax liability.

“We are not sure whether the holding company transaction will be subjected to capital gains tax since it is not a sale but an internal transfer of shares and assets,” Mary Wangari, Equity Bank’s company secretary told investors at the EGM.

“However, there is certainty when it comes to the Housing Finance deal. It is for this reason that we are keen on concluding the two deals by December 31st to avoid being subjected to the taxes,” she added.

Equity is awaiting Central Bank of Kenya and the Capital Markets Authority approvals to sell a 24.7 per cent stake that it holds in HF to Britam for an estimated Sh2.2 billion, having already received the Competition watchdog’s approval.

The lender also wants to transfer 29.9 million shares of Equity Bank Kenya Limited (a new subsidiary) and assets valued at approximately Sh38 billion to Equity Bank Limited to be managed under a new holding company, Equity Group Holdings Limited.

READ: Equity keeps rivals guessing as it exits Housing Finance

The capital gains tax will be applied on the difference between the transfer price, less expenses associated with the transaction (like commissions and other fees), and the adjusted cost of acquisition.

Equity is not certain whether the transfer of assets and shares to its new subsidiary is subject to the tax, exemplifying complaints by some stakeholders that there are many grey areas on how the law will be applied.

The lender says the sale of 57.27 million ordinary HF shares to Britam is however straightforward, adding that subject to regulatory approvals the transaction is “on course” to being completed by the effective date.

The HF share sale will see Equity Bank comply with Central Bank regulations discouraging banks from having strong control on other financial institutions that are not subsidiaries.

The lender says that if the formation of a holding company is not completed by December 31, it will apply for an exemption from Treasury Secretary Henry Rotich from paying the capital gains tax.

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“There is considerable uncertainty as to whether such a waiver can be obtained and how long such an approval may take,” said Peter Munga, Equity’s chairman, in a circular to investors.

“In the absence of such a waiver, your Board may elect not to proceed with the transfer of the banking net assets to Equity Bank Kenya Limited as the incremental tax costs may exceed the potential benefits.”

The Finance Act of 2012 provided that special entities created by banks could own over 25 per cent of their share capital, allowing the lenders to reorganise their shareholding structures and spread risks associated with subsidiaries and associated companies.