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Conversion of Company into LLP – Taxation involved?

The following would not be recognized as ‘transfer’, and thus, no capital gain to be arise on the same:

-Any transfer of an intangible asset or capital asset by a PVT. company or unlisted public company to a LLP.

-Any transfer of a share held in the company by a shareholder as a result of conversion of the company into a LLP as per the Limited Liability Partnership Act, 2008- Section 56/57 .

And for getting such exemption, the following conditions need to be met:

Assets & Liabilities: All the concerned assets as well as liabilities of the company directly become the assets and liabilities of such LLP before the conversion.

Shareholders/ Capital Contribution on conversion:

a) All the company’s shareholders immediately become the partners of the limited liability partnership before the conversion.

b) The capital contribution & profit-sharing ratio of the shareholders in the LLP will be at the same proportion as was their shareholding in the company on the date of conversion.

No Other Benefits To Shareholders: The shareholders of the company not to receive any consideration or benefit, directly/ indirectly, in any form, except as per shares in profit & capital contribution in the limited liability partnership.

Profit Sharing Ratio post conversion: The aggregate of the profit-sharing ratio of the company’s shareholders in the limited liability partnership at any time has to be at least 50% during the period of 05 years from the date of conversion.

Limit of Turnover: The total sales, gross receipts or turnover in the business of the company in any of the 03 previous years preceding the previous year in which the conversion takes place does shouldn’t exceed INR 60 lacs.

Value of Assets: The total value of the assets as are given in the BOA (books of account) of the company in any of the 03 previous years preceding the previous year in which the conversion takes place should not exceed INR 5 Crore.

Accumulated Profit: Either directly or indirectly, No amount is paid, to any partner out of balance of accumulated profit standing in the accounts of the company for a time period of 03 years from the date of conversion.

Exemption will be available only if the conversion satisfies all these conditions –

  • The above-described exemptions is only in relation to capital assets and not any other assets like inventory.
  • The turnover limit is to restrict the tax benefit of this clause to smaller entities which will render a big section of companies willing to convert as ineligible.
  • Assets’s size is an additional factor to look after the company’s eligibility to claim benefit.

Where benefit is taken under Income Tax Act- section 47(xiiib), during such conversion, and at later stage, there is non-compliance of condition regarding ‘Profit Sharing Ratio’ or ‘Accumulated Profit’, then the benefit that has been get now will be charged to tax in the manner as detailed below –

  • Capital Gains exempted of the predecessor company will become income of LLP by way of capital gain in the year in which non-compliance occur, and
  • Capital Gains exempted of the shareholder of the predecessor company on transfer of shares at the time of conversion will become income through way of capital gain in the year in which non-compliance occur.

Where any of the conditions mentioned above are not met with, exemption from capital gains shall not be available. The conditions need to be satisfied at the time of conversion. And also, one essential point to keep in mind is that MAT credit(Minimum Alternate Tax) of the company is not allowed to be carried forward in the hands of limited liability partnership on conversion of company into limited liability partnership.