Converting a private company to a one-person company (OPC) can have significant tax implications for the business and its shareholders. In this article, we will discuss the various tax implications of converting a private company to an OPC.
What is an OPC?
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An OPC is a type of company structure that was introduced in the Companies Act, 2013 in India. As the name suggests, an OPC is a company that has only one person as its member or shareholder. This means that there is no requirement for a minimum number of shareholders in an OPC. The OPC can be formed as a private limited company or a limited company.
Tax Implications of Converting Your Private Company to an OPC
- Capital Gains Tax: When a private company is converted into an OPC, there is a transfer of ownership from the shareholders to the single owner of the OPC. This transfer of ownership is considered a ‘transfer’ under the Income Tax Act and is subject to capital gains tax. The capital gains tax is levied on the difference between the fair market value of the shares of the private company and the consideration paid by the OPC to acquire those shares. The capital gains tax rate is 20% for long-term capital gains and 30% for short-term capital gains.
- Minimum Alternate Tax (MAT): Minimum Alternate Tax (MAT) is a tax that is levied on companies that have not paid any income tax due to certain deductions and exemptions claimed under the Income Tax Act. When a private company is converted into an OPC, it is required to pay MAT for the next five years. This means that the OPC will be required to pay a minimum tax of 18.5% of its book profits, irrespective of its taxable income.
- Dividend Distribution Tax (DDT): When a private company declares and distributes dividends to its shareholders, it is required to pay dividend distribution tax (DDT) at the rate of 15%. However, when an OPC declares and distributes dividends to its single shareholder, it is exempt from paying DDT. This can be a significant tax benefit for the OPC and its single shareholder.
- Presumptive Taxation: When a private company is converted into an OPC, it can opt for presumptive taxation under section 44ADA of the Income Tax Act. Under presumptive taxation, the OPC is deemed to have a profit of 8% of its gross receipts or total turnover. This means that the OPC is not required to maintain detailed books of accounts and can pay taxes on a presumptive basis. This can be a significant tax benefit for the OPC and its single shareholder.
- Minimum Director’s Remuneration: When a private company is converted into an OPC, it is required to pay a minimum remuneration to its director. This is because the single shareholder of the OPC is also the director of the company. The minimum remuneration payable to the director of an OPC is Rs. 1.5 lakh per annum. This remuneration is subject to tax as per the Income Tax Act.
Conclusion
Conversion of private company into OPC can have significant tax implications for the business and its shareholders. While an OPC can provide various tax benefits such as exemption from dividend distribution tax and the option for presumptive taxation, it is also subject to capital gains tax, minimum alternate tax, and minimum director’s remuneration. Therefore, it is important to carefully evaluate the tax implications of converting a private company to an OPC and seek professional advice to ensure compliance with the Income Tax Act.
