S.L. 123.27 Art. 5DTransfer of an interest in a partnership.

(1) The adjusted cost of a partner’s interest in a partnership shall be the cost of such interest determined in accordance with article 5(3A)(a) of the Act, and -

(a) increased by the sum of:

(i) any additional capital contributions made by the partner to the partnership during the period he was a partner,

(ii) the partner’s total share of partnership profits for the period during which he was a partner, and

(b) reduced by (but not below zero) the sum of:

(i) the amount of capital contributions drawn out or received back,

(ii) all partnership profits distributed to the partner during the period he was a partner,

(iii) the partner’s total share of partnership losses for the period during which he was a partner. For the purpose of this sub-rule:

(i) "partnership profits" means the income of the partnership as referred to in article 27 of the Income Tax Management Act, declared by the partners in a return of income;

(ii) "partnership losses" means the amount of losses incurred by the partner from the partnership as referred to in articles 5(10)(a) and 14(1)(g) of the Act;

(iii) "partner or partners" means any person holding an interest in a partnership:

Provided that where the transfer is a transfer of a partial interest the adjustments referred to in paragraphs (a) and (b) shall be made pro rata: Provided further that where it is not practical to apply the said adjustments or where it is reasonable to conclude that the result will not vary substantially from that which would be obtained by applying such adjustments, the Commissioner may in his absolute discretion accept such other adjustments as the transferor of the interest in the partnership may determine.

(2) Gains or profits relating to a transfer of an interest in a partnership shall be determined by deducting, from the transfer value of the interest, the adjusted cost of acquisition of the interest determined in accordance with sub-rule (1). The transfer value of the interest is the higher of the market value of that interest and the consideration paid or payable for the transfer.

(3) The market value of an interest in a partnership is the percentage of the market value of the partnership corresponding to the share to which the transferor is entitled to assets available for distribution on the winding up of that partnership: Provided that -

(a) for the purpose of determining the said percentage, the value of the assets available for distribution shall be deemed to be the market value of the partnership as determined in accordance with sub-rule (4), which shall, unless otherwise provided in the contract of partnership, first be allocated between the partners to satisfy each partner’s capital and current account balances as at the date of the transfer, and any remaining balance of market value shall be allocated among the partners in proportion to their share of the profits of the partnership. The provisions of article 1666 of the Civil Code shall apply where the contract of partnership does not fix the share of each partner in the profits of the partnership. Where the share of the profits of the partnership, as fixed in the contract of partnership, cannot be readily ascertained due to such share being dependent either on a particular condition or a set of conditions, or a formula the attributes of which are dependent on a particular condition or set of conditions, such share shall be determined by reference to the actual apportionment of profits or losses made in the last complete financial year preceding the transfer;

(b) where the market value of the interest of the transferor has been reduced, as a result of any alteration or addition to the contract of partnership including any change in the manner in which the assets of the partnership are to be distributed between the partners upon winding up and to the profit sharing arrangements, made during the period of eighteen months preceding the transfer, the market value of the interest shall be determined by reference to the terms of the contract of partnership, as existing at the time immediately preceding that alteration, addition or change;

(c) where the transfer is a transfer of a partial interest, the market value of the part transferred is to be calculated by reference to such portion of the market value of the whole interest as corresponds to the portion of the interest transferred.

(4) The market value of a partnership is the total of the net asset value of the partnership as resulting from a balance sheet showing the state of affairs of the partnership as at the date of the transfer, to be prepared by a certified public accountant, and drawn up using the same methods and the same layout as used for its financial statements for the financial year preceding that in which the transfer is made:

Provided that -

(a) where the assets of the partnership include shares in a company, and such shares represent at least ten percent of the nominal value of the issued share capital of that company, their book value shall be replaced by their market value determined in accordance with rule 5. So however that where the market value as determined in accordance with rule 5 is a negative figure, their market value shall be taken to be zero;

(b) where the assets of the partnership include immovable property, the book value of that property shall be replaced by its market value, that is to say, the price that the property would fetch if sold on the open market on the date of the transfer;

(c) the net asset value shall be increased by an amount, representing the value of the goodwill, equivalent to two years’ average profits calculated by reference to the profits of the partnership for the five financial years immediately preceding the year in which the transfer is made;

(d) where the partnership has not been in existence for a sufficient period to determine the value of the goodwill in the manner stated in paragraph (c), the average profits shall be calculated by reference to the total profits for the years preceding that during which the transfer is made;

(e) in determining the value of the goodwill, in cases where the provisions of paragraph (a) come into operation, any dividends paid to the partnership out of profits for the years being considered, by another company in which the partnership is a shareholder, are excluded from the calculation;

(f) where the value of the goodwill determined in accordance with the foregoing provisions is negative, the value that shall be taken into consideration shall be nil.

(5) In the case of a transfer of an interest in a partnership that directly or indirectly owns, at the time of the transfer of that interest, immovable property, there shall be allowed a deduction for the increase in inflation calculated in accordance with rule 8 in respect of that immovable property or its relevant portion to be determined on the percentage determined in accordance with sub-rule (3):

Provided that no such deduction for inflation shall be allowed where the book value of shares has not been replaced by their market value in accordance with paragraph (a) of the proviso of sub-rule (4).

(6) The transferor in any transfer of an interest in a partnership shall submit to the Commissioner a statement prepared by a certified public accountant holding a practicing certificate in auditing made on the form prescribed in Schedule G including a computation of the market value of the interest as required by sub-rule (4), and such statement shall be accompanied, where applicable, by an a Perit’s valuation of the market value of the immovable property taken into account in determining the value of the interest.

(7) The statement referred to in sub-rule (6) shall be delivered in triplicate to the Commissioner (Capital Transfer Duty Department) and the transferor shall, together with the delivery, pay to the Commissioner the provisional tax due on the transfer in accordance with article 43 of the Income Tax Management Act, and the Commissioner shall not consider that delivery or the notice of the transfer required in accordance with the Duty on Documents and Transfers Act as valid unless payment is made as aforesaid.

(8) The Commissioner shall stamp one of the copies of the certificate submitted in accordance with sub-rule (7) in acknowledgement of the receipt of same and return it to the person who submitted it.

(9) The provisions of rule 5(13) shall, apply mutatis mutandis, to this rule.

(10) Where the transferor is a person to whom the provisions of article 5(2)(e) or (6)(e) of the Act apply, no valuations need to be made, and the statement referred to in sub-rule (6) shall be made on the form prescribed in Schedule H.

(11) For the purpose of the Act and these rules, "contribution" means the amount of capital that a person contributes to the partnership on his own account consisting of money or other property but does not include a contribution consisting in personal services.