Our last month article focused on clarifying the tax regime for losses resulting from corporate
restructuring operations, as established by the 2024 Finance Law. We demonstrated that under certain
conditions, such losses can be deductible or non-deductible from the profit for the calculation of
Corporate Income Tax (CIT), in accordance with Section 7-C of the General Tax Code (GTC).
However, Circular No. 020/MINFI/DGI/LRI/L of May 8, 2024, specifying the modalities for applying
the tax provisions of the 2024 Finance Law, signed by the Directorate General of Taxation, expressly
excludes Spin-off from the scope of mergers and acquisitions covered by this deduction regime. This
exclusion, therefore results from an administrative act. It is therefore incongruous. Indeed, since the
law is silent and has not left room for the tax administration to define and determine the operations
subject to this regime, it is difficult to understand how the circular, which emanates from the
administration, could supersede the law. Such an exclusion is likely, wrongly, to deprive unskilled
taxpayers of a tax benefit or to expose them to tax adjustments whenever they will have deducted
losses resulting from Spin-off operations. It is therefore appropriate to question the legitimacy of the
arguments underlying this exclusion. A dynamic analysis invites us to present the reasons of the tax
administration (I) before proceeding with a critical examination of the latter (II).
I- Reasons for the exclusion of spin-off by the tax administration
Relying on the circular implementing the 2024 Finance Act, the tax administration outlines the reasons
underlying the exclusion of spin-off from the benefit of the regime of deductibility of losses resulting
from restructuring operations. There are two main reasons for this: the non-legal but administrative
definition of spin-off and the conclusion that this operation does not result in the transfer of liabilities.
Regarding the definition, the aforementioned circular specifies on page 6 that spin-off is “the
operation by which a company contributes to another company (new or pre-existing) a part of its
assets and receives in exchange shares issued by the company receiving the contribution.” Upon
analysis, this operation corresponds, according to the position of the tax administration, to a simple
transfer of the asset items of a company. It would therefore be for the said company to contribute to
another, a set of goods and rights; in particular, tangible, intangible or financial assets, as well as
receivables in exchange for shares. As for the non-transfer of liabilities mentioned by the tax
administration and which appears to be the fundamental reason for the exclusion of spin-off, this is
merely the result of the definition it makes of this operation. The circular reveals on page 7 that spin-
off does not constitute a restructuring operation that simultaneously entails the transfer of assets and
liabilities to the beneficiary company. The exclusion is formulated as follows: the provisions of
Section7-C of the GTC do not apply to “(…) deficits resulting from spin-off due to the non-transfer of
liabilities during this type of restructuring.” According to the Administration, the measure in the
aforementioned section 7 only benefits merger and demerger operations. However, such reasons
appear fallacious and render this exclusion of spin-off by the tax administration questionable in several
respects.
II – Technical Assessment of the Reasons for Exclusion by the Tax Administration
The arguments put forth by the tax administration to exclude spin-off from the benefit of the deduction
regime are neither legally nor factually grounded. On the legal front, the Tax Administration’s
approach presents two major limitations. First, the definition of spin-off as created by the tax
administration is contrary to that provided by the OHADA Uniform Act on the Law of Commercial
Companies and Economic Interest Groups. Indeed, in accordance with the provisions of Article 195 of
this OHADA Uniform Act, spin-off is: “the transaction by which a company contributes an
autonomous branch of activity to an existing company or a company to be created (…).” From this
definition, it emerges that what is contributed is not just asset items as claimed by the tax authorities,
but an independent business division, that is, a division of a company with its own wealth-generating
autonomy. Secondly, the circular implementing the 2024 Finance Act formally violates the principle of legality, an administrative law principle that requires the administration to comply with the superior
rules of law in its actions. Applying this principle, the circular of the Directorate-General of Taxation
should have simply reproduced the definition established by the OHADA Uniform Act, which is a
special and supranational law. On the factual level, the administration’s conclusion that spin-off does
not involve the transfer of liabilities is erroneous. This is because there is indeed a transfer of liabilities
and assets in a spin-off transaction, which is in reality the transfer of an autonomous business division.
Two arguments support this assertion. The first comes from the doctrine. Indeed, the French Emeritus
Tax Law Professor Maurice COZIAN and Florence DEBOISSY in their Textbook on Corporate
Taxation 2009/2010 (page 550) define an autonomous business division as “(…) assets and liabilities
of a division of a company that constitute, from the organizational point of view, an autonomous
branch, that is, a set capable of functioning with its own means.” It is therefore clear that liabilities and
assets are transferred as part of spin-off operation. This is also the implicit position taken by the
administration in the 2010 Administrative Tax Doctrine Compendium (page 70), where it defines spin-
off as the contribution by a company to another “(…) of only a part of its patrimony (…),” understood
as a part of the assets and liabilities. The second argument stems from the contradictions perceptible in
the tax authorities’ narrative. Indeed, the circular states that “(…) the deficits resulting from spin-off
operations (…)” are not deductible. However, there is deficit when liabilities are greater than assets. If
the spin-off therefore consists exclusively of the transfer of asset items, there could not be deficits
resulting from the spin-off. Hence, the administration indirectly recognises the transfer of liabilities in
a spin-off operation.
In conclusion, the exclusion by the administrative circular of spin-off from the benefiting regime for
the deduction of losses resulting from restructuring operations provided for in section 7-C of the
General Tax Code rests on weak legal grounds. It results from a wrong definition of spin-off that leads
to the non-transfer of liabilities. It is thus at odds with those established by the OHADA legislator and
the doctrine. Such an aberration is likely to create a real tax injustice and prove detrimental to certain
taxpayers, hence the need to correct it in order to keep constructing a State governed by the rule of
law. It remains for companies to seek the assistance of tax and legal advisors to protect them from
potential tax adjustments following their spin-off operations.
Author: Yves Abena, Tax & Legal consultant; supervisor: Albert Désiré Zang, Managing Partner