A company ABC Ltd. has been making large
profits for many years. To avoid profits tax, it paid $10,000 to buy all the
shares of a dormant company which had no valuable assets but accumulated tax
losses of $5,000,000. Then, it changed the name of this dormant company to,
say ABC & Co. Ltd., one
like its own name, and then injected its own business into the new company. After setting-off
all the losses with its own business profits, it had the dormant company wound-up so
that all its assets (bank balances) were distributed to ABC as dividends on
liquidation. The dividends on liquidation are not taxable under Section 17.
The cost of liquidation was $10,000. By so doing, it avoided to pay tax on
$5,000,000 profits ($5,000,000 * 16.5% = $825,000), with a total cost of
$20,000, thus giving a net tax saving of $805,000.