From 2012 to 2014, capital gains resulting from the sale of shares were taxable only in the context of direct transfers of shares conducted in Cameroon or abroad. With the Finance Law for the 2015 fiscal year, this taxation was extended to include indirect transfers of shares. This change led to the amendment of Section 42 of the General Tax Code (GTC), which defines an indirect transfer of shares as: “(…) any transfer executed in Cameroon or abroad between two foreign companies within the same consolidation scope when one of the entities in this scope wholly or partially owns the capital of a Cameroonian company.” According to Section 44 of the GTC, as amended by the 2015 Finance Law, this refers to a transaction between foreign entities that occurs in Cameroon or abroad, resulting in the transfer of the foreign entity’s participation in the capital of the Cameroonian company. Given that companies frequently engage in this type of transfer, the administration suspects it may serve as a means to circumvent certain legal and tax constraints. Therefore, to better secure the state’s tax revenues, the Cameroonian tax legislature has established a set of rules regarding the taxation of capital gains generated by such transactions. In this context, the Finance Law for the 2024 fiscal year has supplemented the regulatory framework for indirect transfers of shares with amendments concerning taxation methods. Despite these amendments, the taxation of capital gains from indirect transfers remains unclear in several respects and is prone to potential abuses. It is therefore crucial to assess the current tax regime for indirect transfers of shares in Cameroon. To achieve this, an examination of the tax treatment of this operation warrants a critical analysis.
I. Tax Treatment of Indirect Transfers of Shares
The indirect transfer of shares has three main fiscal consequences: the declaration of the transfer to the competent tax authority, the payment of registration fees, and the taxation of capital gains from the transfer of shares. Firstly, concerning the declaration, Section L 1 and L 86-a, paragraph one of the GTC require the Cameroonian entity whose shares are indirectly transferred to report the transfer to its associated tax office within fifteen (15) days from the date of the transfer. This deadline is extended to three (3) months when the transfer occurs abroad or involves foreign entities. The declaration must be accompanied by an explanatory document valuing the indirectly transferred shares. Failure to comply with this reporting obligation results in the Cameroonian entity incurring a fixed penalty capped at five million (5,000,000) CFA francs, along with a daily fine of one hundred thousand (100,000) CFA francs for each day of delay. If the explanatory document for the valuation of the shares is not provided, the administration may determine the taxable capital gain by any means, which is binding on the taxpayer. Regarding the payment of registration fees, Section 543 (c) and (d) of the GTC, along with the 2021 Finance Law circular, stipulate that indirect transfers are subject to registration fees at a rate of 5% when the transfer results in the transferee holding directly or indirectly more than 50% of the shares. In other cases, the fees are assessed at a rate of 2%. The same article specifies that the registration fees base is the portion of the transfer price corresponding to the foreign entity’s participation in the capital of the Cameroonian company. The Cameroonian company is jointly responsible with the transferee for the payment of the registration fees associated with the indirect transfer. Finally, the capital gains realized from the indirect transfer of shares are subject to capital gain tax under Sections 70 and 71 of the GTC. The tax is calculated at a flat rate of 33% when the capital gain benefits an individual or corporate entity located in a territory or state classified as a tax haven, and at 16.5% in other cases. The taxable base is determined by the capital gain realized from the foreign entity’s transfer of its participation in the capital of the Cameroonian entity. This gain is the difference between the transfer price and the purchase price or the acquisition value of the shares when they are acquired at the company’s formation or through a capital increase. The 2024 Finance Law specifies that the transfer price must not be less than the value of the shares transferred. The administration may assess the valuation of the shares according to the methods outlined in the application circular of the 2024 Finance Law.
While it is true that the various taxes arising from indirect transfers of shares are well established, the tax regime governing this operation requires improvements in certain aspects.
II. Critical Analysis of the Taxation of Indirect Transfers of Shares
Although the registration fees for indirect transfers of shares do not present significant challenges, the declaration of the transaction and the taxation of capital gains exhibit several gaps and ambiguities that could undermine the protection of taxpayers’ rights. Four main criticisms can be directed at the current tax regime for indirect transfers of shares. Firstly, the rules for determining capital gains (the taxable base) are incomplete. The existing tax legislation in Cameroon does not allow for the assessment of the portion of the total transfer value, whether occurring abroad or in Cameroon, that corresponds to the indirectly transferred shares of the Cameroonian entity. This poses a significant challenge for capital gains taxation, highlighting a serious legal gap that must be urgently addressed. It is evident that if the rules for the taxable base are not clearly defined by law, the methods for calculating tax are compromised before their implementation. Secondly, the requirement imposed on taxpayers by the legislature to disclose their valuation methods for indirectly transferred shares is contrary to the Cameroonian constitution. Since taxation falls within the legislative domain according to Section 26 of the constitution, it follows that the rules for establishing the taxable base, as well as the calculation, collection, and rates of taxes, are the exclusive responsibility of the legislature. By delegating this responsibility to the taxpayer, the legislator has effectively abdicated its duties. The value of the indirectly transferred shares is crucial for determining the capital gains (the taxable base). Specifically, this capital gain is defined as the difference between the portion of the total transfer price corresponding to the indirectly transferred shares and the purchase price or acquisition value of the shares at the time of the company’s formation or capital increase. Instead of relying on the taxpayer, the legislator should have clearly and precisely outlined the valuation mechanisms for the relevant shares within the Finance Law. Failing to do so raises concerns that the reliance on the taxpayer, as stipulated in Section L 86-a of the GTC, is unconstitutional. In the event of a dispute, since the constitution prevails over tax law, the taxpayer would be justified in invoking the principle of the hierarchy of legal norms to evade tax penalties. Thirdly, the GTC’s provision allowing the administration to value the shares without specifying the method appears to constitute legalized arbitrariness. This option applies in two scenarios: when the taxpayer has not provided the document explaining their valuation method and when the administration believes the taxpayer has undervalued the shares. In such cases, the administration could exercise its discretionary power, as the law imposes no limitations on it. Moreover, the tax authority has outlined certain methods it intends to employ in the circular for the implementation of the 2024 Finance Law. This creates a situation where the administration acts as both judge and party, with its valuation being binding on the taxpayer.
In summary, the indirect transfer of shares in Cameroon entails the declaration of the transfer, the payment of registration fees, and the taxation of capital gains. However, the tax regime governing this operation suffers from several deficiencies and imperfections that need to be addressed to prevent administrative abuses that could harm taxpayers.
Author: Jean Didier Ozoto, Tax & Legal Consultant Supervisor: Albert Désiré Zang, Managing Partner