A Mauritius-based client had extended a loan to their Ugandan subsidiary, which was now facing financial challenges and unable to service or repay the loan. The subsidiary was being sold, but the prospective buyer was unwilling to assume responsibility for the outstanding loan. Complicating matters, the Ugandan subsidiary had a substantial tax loss position, which raised concerns about potential tax liabilities associated with writing off the loan.
Loan capitalisation into equity by issuing new shares at a significant share premium. This approach allows the loan to be converted to capital without creating an immediate tax liability.
A tax risk mitigation confirms that capitalising the loan, rather than writing it off, aligns with Ugandan tax regulations, reducing the risk of a large tax liability.
Future financial stability as this capitalisation strategy strengthens the subsidiary’s balance sheet, improving its attractiveness to the purchaser while ensuring compliance with local regulations.
By capitalising the loan, the client successfully avoided the potential tax liability of a loan write-off. This restructuring provided a clear path forward, supporting the group’s commercial goals and facilitating the sale of the Ugandan subsidiary in a tax-compliant manner.
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