Business entities are constantly springing up and for obvious reasons, the tax collector is very much interested in that. It would therefore be prudent for a prospective business owner or investor in the Ghanaian market to know the tax implications involved in establishing a business in Ghana. The business types that are legally recognized under Ghanaian laws are as follows:
- Sole Proprietorship
- Partnership
- Companies:
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- Companies Limited by Guarantee;
- Companies Limited by Shares;
- Unlimited Company; and
- External Company
a. Sole Proprietorship
Sole proprietorship, as a business entity, does not have to be incorporated under Ghanaian law, however its business name may be registered under the Registration of Business Names Act, 1962 (Act 151), subject to annual renewal. Generally, all citizens are resident for tax purposes in Ghana whereas a non-citizen is resident for tax purposes if that individual is present in Ghana for a period(s) amounting in aggregate to 183 days or more in any 12-month period that commences or ends during the year of assessment. For tax purposes, the sole business owner and the sole proprietorship are considered as one body, and where the owner makes an income above GHS 402.00 from all income sources, including, employment, business and investment in a month, the owner is subject to pay Personal Income Tax ("PIT").
b. Partnership
A partnership is incorporated under the Incorporated Private Partnership Act, 1962 (Act 152) and it is basically the association of two or more individuals carrying on business jointly for the purpose of making profits. Limited liability Partnerships are not recognized under the laws of Ghana. The partnership itself does not pay any corporate income taxes however, the partners are liable to pay PIT on their individual employment income where it exceeds GHS 402.00 in a month. The Partnership shall withhold taxes on the income it pays to its employees, its investment returns, the supply of goods, service fees and contract payments.
c. Companies
Companies are incorporated under the Companies Act, 2019 (Act 992) (the "Companies Act") of Ghana. There are different types of companies and their tax implications shall be analyzed separately. However, generally, a company is considered as resident for tax purposes according to Section 101 (4) of the Income Tax Act, 2015 (Act 896) ("Income Tax Act") if the company was incorporated under the laws of Ghana or if management and control of the company's affairs are exercised in Ghana at any point in the year. (Yes, it is safe to say board meetings hosted in Ghana broadens the smile of the Ghana Revenue Authority (GRA)).
Contracts that are entered into by the company before its formation, that is pre-incorporation contracts also attract corporate income taxes, taxes on the supply of goods, services and payments. The Companies Act allows a company to ratify pre-incorporation contracts within 18 months after it is incorporated.
i. Companies Limited by Guarantee
These are companies that are created not with the purpose of making profits other than profits for the furtherance of its business objects. This means profits that are realized from their business activities are to be fully used to support their "not-for-profit" business objects as a company. There are no shareholders involved in this company type and companies limited by guarantee are exempted from paying corporate income taxes. Charitable organizations would have to obtain approval by the Commissioner-General of the GRA to enjoy this exemption. Nonetheless, any gain or profit from the business of the company is liable to other forms of tax under Sections 97-99 of the Income Tax Act. A company limited by guarantee must withhold taxes on its investment returns, the supply of goods, service fees and contracts as well as income it pays to its employees.
ii. Unlimited Companies and Companies Limited by Shares
We shall consider unlimited companies and companies limited by shares together as provided for under Section 7 of the Companies Act. The company is a separate entity from its shareholders and as such, is taxed independently pursuant to Section 58 (1) of the Income Tax Act. The Company is subject to pay corporate income tax on its profits and withhold taxes on its investment returns such as dividends, lottery winnings, annuity, natural resource payments, rent etc., the supply of goods, service fees, contract payment and the income it pays to all of its employees including the directors and secretary.
Upon incorporation of a company, the stated capital of the company attracts a capital duty of 1% on the amount of the total stated capital as well as with every increase in the stated capital. On the other hand, where a company reduces its capital and makes a profit, it will be taxed on that profit. However, if it incurs a loss, the loss can be deducted from the company's income. Depending on the sector the company operates in, losses would be allowed to be carried over for a period of three or five years.
The transfer of shares is exempt from payment of stamp duty however a gain or profit realized by a shareholder from a share transfer or sale transaction is liable to tax in the hands of the shareholder. Interest or dividends paid to a holder or member on an investment in an approved unit trust scheme or mutual fund is also exempt from tax in accordance with the Income Tax (Amendment) Act, 2016 (Act 907).
A company can also raise capital through debentures and they attract a stamp duty. Not every interest incurred on a debt from debenture holders may be allowed as deductible expenses.
Pursuant to Section 100 of the Income Tax Act, where companies make donations or contributions towards a worthwhile cause, they may claim a deduction that is equal to the donation from their income for tax purposes during the year of assessment.
Furthermore, the gains on realization of an asset accruing to or derived by a company arising out of a merger, amalgamation or re-organization of a company is liable to tax where there is continuity of less than 50% of the underlying ownership in the asset pursuant to Section 47 of the Income Tax Act.
iii. External Companies
These are companies that are incorporated in foreign jurisdictions but have an established place of business in Ghana and earn repatriated profits. An established place of business could be a branch, management, registration office or a fixed place of business. An external company must pay taxes on all profits earned in Ghana. Taxes are to be withheld on all investment returns earned in Ghana, the supply of goods, service fees and contract payment as well as the income it pays to its employees.
All taxes are to be paid at rates that are specified in the Income Tax Act. Tax obligations are mandatory and if not complied with can lead to jail term and/or fines. We are happy to provide you with more details and assistance if required.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
