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Tax Aspects of Profit Share Advances

The Corporations Act has brought a lot of positive changes since January. Members of corporations certainly welcome the option to pay profit share advances on the basis of interim financial statements, provided the corporation clearly has enough to pay them and other legal conditions are fulfilled.

How are the advances taxed? Unfortunately, the amendment to the Income Tax Act (ITA) did not sufficiently address such changes and therefore certain situations will be problematic for taxpayers.

Although it is not expressly set forth by the ITA, the tax regime for paying a profit share advance is most likely identical to the regime for paying out profits. But trouble may occur if – in the period between the payment of the profit share advance and the moment of settlement – a member is changed, for example, if the corporation does not generate a sufficient level of profit or the general meeting does not approve the dividends payment. The ITA does not specifically cover such situations. Who is the taxpayer in this case? Can a corporation apply to have withheld tax returned? There are no clear answers. Therefore, the act will most likely have to be changed or a clear standpoint from the General Financial Directorate will be necessary.

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