Changing A Personal Restricted Legal responsibility Firm Into A Restricted Legal responsibility Partnership: Key Tax Concerns – Gross sales Taxes: VAT, GST

In February 2021, for the first time in its history, Rwanda

enacted a law governing partnerships (law no 0082021 of

16/02/2021) aimed at providing more structuring options for

investors intending to use Rwanda as a holding jurisdiction within

the ambit of the larger Kigali International Financial Centre

(KIFC) project.

The law governing partnerships provides for the possibility of

converting a private limited liability company

(“LLC“) into a limited liability

partnership (“LLP“) and recently, the

registrar general issued the requirements to effect these

conversations. This means that companies can now start converting

to LLPs.

This conversion option will be useful for various market

players, including small and medium companies, professional service

firms run as companies, and companies holding investments.

This is because LLPs offer the limited liability protection in

the same way that companies do, but unlike companies, LLPs may be

subject to less stringent compliance requirements, are free from

the economic double taxation risk, as LLPs’ income accrues

directly to their partners, at least in terms the changes proposed

to the law nº 016/2018 of 13/04/2018 establishing taxes on

income (Income Tax Law), and there is potentially no capital gains

tax (CGT) in case of the disposal of interest in the LLP.

But what are the key tax considerations that should be borne in

mind when converting an LLC into an LLP?

To begin with, and as legal consequence of converting an LLC

into an LLP, article 110 of the law governing partnership provides

that “(a)ll movable and immovable property vested in an (LLC),

all assets, interests, rights, privileges and liabilities and the

whole of the undertaking are entrusted with the (LLP), and the

(LLC) is considered as dissolved.”

The reading of this provision clearly suggests that the

conversion of an LLC into an LLP may be construed either as

liquidation of the LLC and distribution of assets

to the shareholders as the assets of the LLP are from a tax

standpoint the assets of the partners, or transfer of the

LLC
business as a going concern to the LLP.

Where the conversion is construed as a sale/transfer of the

converted LLC business to the LLP as a going concern, a valuation

would have to be performed and the deemed proceeds from the

transfer of the LLC assets would be taken into consideration in

computing the LLC corporate income tax liability for its last tax

year as per article 19 of the Income Tax Law, which provides that

“business profit also includes proceeds of sale of any

business asset.”

Such construction would also have value-added tax implications

because unlike many jurisdictions, there is no exemption from VAT

on slump sale transactions in Rwanda, and the conversion would be

potentially taxed as a sale of business assets under article 4 of

law n° 37/2012 of 09/11/2012 establishing the value-added tax

as amended (VAT Law) which provides that “(t)he sale of any

asset used by a person in the business is considered as a taxable

action.”

Where the transaction is treated as a liquidation followed by

distribution of assets to the shareholders (who would become the

LLP partners), deemed proceeds from the transfer would, after

deducting the value of the liabilities and the shareholders equity,

be taxed as a dividend as per article 55 of the Income Tax Law. The

VAT Law is not prescriptive on the tax implications of the

distribution of assets in specie to the shareholders at the time of

liquidation, but this may also potentially have VAT implications by

being treated as a deemed sale on the basis of article 4 of the VAT

Law.

However, if the proposed amendments to the Income Tax Law are

enacted into law, the conversion of LLCs into LLPs will not have

income tax implications considered above, as part of those

amendments is the modification of the definition of tax-free

restructurings for it to apply to other entities than companies as

this currently is the case under the Income Tax Law. For instance,

in terms of the proposed amendments, business restructuring

includes the acquisition or transfer of the entire entity’s

shares, assets or liabilities so that its existence is replaced by

the purchasing or receiving entity, and this fully depicts the

conversion of an LLC into an LLP. Under article 54 of the Income

Tax Law, the transferring company is exempt from tax in respect of

capital gains and losses realised on restructuring in case of a

qualifying business restructuring.

Another tax consideration that is relevant to the conversion of

an LLC into an LLP is the right to carry-forward losses. The

provision of the law governing partnership that “all rights

and privileges’ are entrusted with the LLP” would suggest

that these rights include tax losses, and therefore, the LLP should

be able to carry forward the losses of the converted LLC. However,

this not being a provision in tax legislation, the tax

administration should provide guidance regarding the tax

implication, if any, of the conversion of an LLC into an LLP on the

right of the converted LLC to carry forward losses.

The Income Tax Law is equally reticent on the cost basis for

depreciation of assets transferred once on the LLP’s balance

sheet i.e. whether they should be depreciated at their book value

(as if the conversion did not take place) or there should be an

adjustment of the cost basis of the transferred assets to their

fair market value. This would however become irrelevant once the

proposed amendments to the Income Tax Law are enacted into law as

the conversion of an LLC into an LLP would constitute a qualifying

business restructuring. Under article 54 of the Income Tax Law, the

receiving entity would therefore have to value the assets and

liabilities involved at their book value in the hands of the

transferring entity at the time of restructuring and depreciate the

business assets according to the rules that would have applied to

the transferring entity as if the restructuring did not take

place.

The conversion of an LLC into an LLP may be attractive to many

companies, but there are a number of tax aspects to consider, all

of which remain unclear. As such, specialist tax advice should be

obtained before proceeding. The tax administration should also

consider issuing guidance on the aspects discussed above, and

particularly consider whether article 54 of the Income Tax Law can

(pending the enactment of the proposed amendments) potentially be

extensively applied to conversions of LLCs into LLPs given that the

status quo is that partnerships are treated in the same way as

companies for income tax purposes. Tax policymakers should also

consider reviving the exemption of sale of a business as going

concern from VAT which was provided for under the 2001 VAT Law.

The content of this article is intended to provide a general

guide to the subject matter. Specialist advice should be sought

about your specific circumstances.

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