Procedure for selling shares or quotas in a company

To facilitate the sale of shares or quotas in a company, or to handle mergers and absorptions, the following steps must be followed in accordance with Law No. 29/2023 on Income Tax and Instruction No. 26, dated 08.09.2023. This procedure ensures accurate taxation, legal compliance, and transparency for all parties involved.

Key Steps

• Valuation of Shares/Quotas and Calculation of Taxable Profit

Determine the sale price of shares or quotas based on the contract and ownership details.

Calculate the taxable profit as the difference between the sale price and the acquisition cost (or book value if acquisition cost is unavailable). Acceptable valuation methods include book value from financial statements, market-based valuation, or discounted cash flow, as agreed by the parties.

For mergers or absorptions, assess the change in capital structure for tax purposes, ensuring compliance with legal provisions for asset and liability transfers.

• Declaration and Notification to Tax Authorities

The seller must declare the profit from the sale in their annual tax return, due by March 31 of the following year, as specified in Instruction No. 26.

In cases of mergers or absorptions, the acquiring company must report changes in capital structure and tax implications to the tax authorities within 30 days of the transaction, per legal requirements.

• Taxation of Profits from Share/Quota Sales

Profits from the sale are taxed as capital gains at a rate of 15%, as per Law No. 29/2023.

For a 100% quota sale, the tax applies to the net profit (sale price minus acquisition cost or book value).

In mergers or absorptions, specific provisions apply for taxing transferred assets and liabilities, ensuring alignment with the law.

• Tax Payment and Withholding (if Applicable)

The tax on profits may be withheld at source by the paying entity (e.g., the company or buyer) if stipulated in the transaction agreement. If not withheld, the seller must pay the tax within 30 days of the transaction to avoid penalties or interest.

Timely payment is critical to comply with legal deadlines and avoid additional costs.

• Documentation and Audit

Maintain comprehensive records, including sale contracts, valuation reports, financial statements, and proof of tax payment, to demonstrate compliance.

Tax authorities may conduct audits to verify the accuracy of profit calculations and tax payments, as outlined in the legal framework.

Summary

The process involves:

• Valuing the shares/quotas and calculating the taxable profit.
• Accurately declaring the realized income to tax authorities.
• Paying the applicable tax, which may be withheld at source.
• Ensuring compliance with specific provisions for mergers or absorptions under Law No. 29/2023 and Instruction No. 26.

For a 100% quota sale, the tax is applied to the declared net profit. In corporate transactions like mergers, specific rules govern the taxation and transfer of assets and quotas. This procedure ensures accurate taxation of profits from share/quota transactions, accommodating both standard sales and complex corporate restructurings.

Example: Sale of shares with procedural steps

To illustrate the process under Law No. 29/2023 and Instruction No. 26, dated 08.09.2023, consider the following example:

Scenario

• Partner A owns 30% of shares in Company X.
• The book value of these shares, based on audited financial statements, is 1,000,000 ALL.
• Partner A agrees to sell the shares to Partner B for 1,200,000 ALL, reflecting market demand and the company’s growth potential.

Procedural Steps

1. Preparation of Financial Statements and Valuation

Company X prepares audited financial statements, reflecting a net asset value of 1,000,000 ALL for the 30% shares.

An optional independent valuation confirms the market value aligns with the agreed sale price.

• Negotiation and Final Sale Price

Partner A and Partner B negotiate and agree on a sale price of 1,200,000 ALL, which exceeds the book value due to the company’s projected growth.

The agreed price is formalized in a sale contract, reflecting market-based valuation.

• Calculation of Taxable Profit

Taxable profit = Sale price (1,200,000 ALL) – Acquisition cost (assume 1,000,000 ALL, based on historical purchase records) = 200,000 ALL.

If acquisition cost records are unavailable, the book value from financial statements is used.

• Declaration and Tax Payment

Partner A declares the 200,000 ALL profit in their annual tax return, due by March 31 of the following year.

Tax at 15% = 200,000 ALL × 15% = 30,000 ALL, paid within 30 days of the transaction unless withheld at source by Company X.

• Notarial Contract

The parties sign a sale contract at a notary, incurring fees of approximately 10,000–20,000 ALL, depending on the transaction value.

The notary certifies the ownership transfer for registration purposes.

• Registration in the Commercial Register

The notarized contract is submitted to the National Business Center (QKB) within 7 days to update the ownership records.

Additional QKB fees (e.g., 5,000–10,000 ALL) may apply.

• Mergers/Absorptions (if Applicable)

If Company X merges with another entity, the share price is determined by book value or mutual agreement.

The acquiring company reports the transaction to tax authorities within 30 days and pays any applicable taxes on transferred assets, as per Law No. 29/2023.

Key Notes

• The sale price may deviate from the book value, but the taxable profit is based on the agreed price minus the acquisition cost or book value.
• Compliance with notarial and QKB registration ensures legal transfer of ownership and fiscal transparency.
• For mergers, a similar valuation and reporting process applies, with specific tax rules for asset transfers.

This example demonstrates that parties can negotiate a sale price different from the book value, but the taxable profit must be calculated based on the agreed price and historical cost. The notarial and registration processes formalize the transaction, ensuring compliance with legal and tax obligations.

Importance of compliance Timely and effective compliance with these steps prevents administrative errors and penalties, while accurate reporting positions the process as a model for transparent and equitable economic transactions. Sustainable implementation can serve as a national and regional example for fair and compliant corporate practices.