Tax Loophole

May 22, 2007 (LBO) – The new company law gives companies a better chance to avoid paying tax on investment income, a corporate law expert said Tuesday. A company's distribution of shares to shareholders may be treated as a dividend as it can distribute dividends only out of profit under Section 60 of the Companies Act. The new Companies Act No. 07 of 2007 provides for general business purpose companies with no objects clause, said Naomal Goonewardena, attorney-at-law and Partner, Nithya Partners.

This gives more flexibility when compared with the old law in which the articles of association limited the types business a company can operate in.

"Companies having substantial investment income would have greater flexibility to argue that their investment income is not interest, but a trade profit," Goonewardena said.

He was speaking at a seminar on recent amendments to tax laws and the tax implications of the new company law organized by the Sri Lanka Institute of Taxation.

Under the old law, companies claiming tax exemptions or tax deductions on expenses would usually face Inland Revenue Department references to their objects clause, G