Variable rate loan stock companies (VRLSCs) are gaining popularity globally, and Botswana is witnessing a similar trend. These companies specialise in developing real estate properties and issue debt securities with variable interest rates. Several shopping malls in Botswana have been developed by such entities.
While investing in VRLSCs can offer investors higher returns compared to traditional fixed-rate debt securities, it also entails greater risk. In addition to the inherent investment risks, VRLSCs present unique tax considerations, which will be discussed in this article. Please note that throughout this article, terms denoting the masculine gender are intended to encompass both masculine and feminine genders.
Enter VRLSCs
The fundamental concept behind a Variable Rate Loan Stock Company (VRLSC) is to issue a diverse range of loans to various borrowers, consolidating them into a single investment entity. Investors then purchase shares in the company and receive periodic payments based on the interest rates applied to the loans within the pool. A
s interest rates fluctuate, the returns on these investments can vary accordingly. Typically, these companies provide investors with the opportunity to invest in a portfolio of mortgages, with the expectation of a variable return tied to the performance of the underlying loans. Having outlined the general framework of VRLSCs, let’s delve into the tax implications associated with these entities.
Enter Tax
The Income Tax Act defines a VRLSC as ‘a company with limited liability in Botswana in terms of the Companies Act, the objects of which in terms of its Memorandum of Association are restricted to investment in immovable property and the development, refurbishment and maintenance thereof, and which, in terms of its Articles of Association, issues shares and debentures which together comprise linked units.’
Now, let’s get into some of the specific tax aspects of VRLSCs in Botswana. Firstly, it’s imperative to understand that these companies are subject to the normal corporate income tax. Amongst some of the special tax treatment they enjoy, VRLSCs are eligible for tax incentives, such as full deductions for interest paid. That is to say, their net interest expense is not restricted to the 30 percent limit of Tax EBITDA applicable to most businesses which don’t have specific exemptions from such limitations.
Secondly, these companies are allowed to deduct the interest which they declare as a dividend despite the fact that dividends are not generally tax deductible. This technically reduces the effective tax on such companies as they reduce their taxable income through the interest deductions, making them more tax-efficient as compared to any other property development entity. However, no tax deduction can be made on the dividend linked to normal shares. In addition, these entities are required to deduct withholding tax on the interest and normal dividends they declare at the applicable withholding rates.
Conclusion
In conclusion, VRLSCs present unique tax benefits in Botswana and taxpayers should be aware of the various rules and regulations that apply to these companies. In particular, taxpayers should seek professional advice to ensure that they take advantage of all applicable tax deductions which reduce taxes. By understanding the tax implications of VRLSCs, taxpayers can make informed decisions that maximise their tax savings while remaining compliant with the tax laws.
Well, folks, we hope that was insightful. As we the two Yours Trulies say goodbye, remember to pay Caesar what belongs to him. If you want to consult, join our free Tax WhatsApp group or to know about our 9 Tax e-books, send a text to +267 7181 5836 or email us at jhore@aupracontax.co.bw. You can read more tax articles on our website, www.aupracontax.co.bw under the ‘Tax articles’ tab.
