[Malik M Imran]

I am new member of this forum and found it very informative not only for tax issues but for other corporate legal discussions. I have following questions to be advice by experts in this forum:
BACKGROUND
Services company name ABC Opco Ltd is private limited company. It also runs Registered Gratuity Fund (or Trust also duly registered with Commissioner Income Tax) for its employees with eligibility criteria of 4 years of continued services as permanent employee. In recent times it entered in equity sale agreement with XYZ Corp Ltd for selling of its 100% shares. Both companies are in same nature of business. The acquiring company has intent  to merge both companies into one company (say Merg Co). The acquiring Corp doesnot run gratuity program for its existing employees.
In this scenario I want to seek your guidance on following questions:
1.      What would be the status of ABC gratuity fund trust?
2.      Can Merg Co close gratuity fund or trust?
3.      Can Merg Co refuse to pay to fund for maintaining required balance according to actuarial valuation?
4.      Does Merg Co has right to appoint new trustees of fund?
5.      Does Merg Co can make changes in trust deed to amend fund contribution clause?
6.      In case of above, is only board of trustees of fund can authorize change in trust deed or consent of all the eligible members of the fund is necessary?
7.      Can Merg co freeze fund at any cut off date?
a.      In above case when members will be paid their respective amounts
b.      If paid on subsequently at time of termination of services, what will happen to profits on investments made by fund and how these will be treated (or allocated)
8.      In case it is decided to abolish trust altogether, what will happen to the funds available on cut off date and does member will?
a.      Be paid till cut off time on date of closing of fund
b.      If a. is applied, what would be tax implications for members, as this will be before termination of services of employee
c.      Any exemption option available to members or trust as whole
Please provide a legal opinion with references to applicable laws and regulations.

[Ather Saleem]

Dear Malik sb.
 
This is a very practical issue and normally happens in mergers, acquisitions, and change of shareholders / management. So Co. A and B and merged to become C.
 
Important points/concepts to kept in mind while deliberating on this matter:
·       The merged company C takes over all assets and liabilities of the merging companies.
·       The agreements of merging companies are also carried on by Company C.
·       Such agreements can be altered with consent of both parties as per agreement terms.
·       Employer and Employee relationships are also based on an agreement.
·       Employers cannot one-sided change terms of employment
·       Any change in employment terms either has to be mutual or the agreement can be terminated by either party as per terms of agreement i.e. resignation or termination.
·       Funded Gratuity is managed under a Trust; the contribution liability does not arise from Trust / establishment of Trust but from employer / employee agreement.
·       Trust registered with Commissioner Income Tax though irrevocable, but registration is meant for Income Tax benefits
·       Any changes to trust deed must be approved by Commissioner Income Tax
·       Payment under registered (CIT) Gratuity Trust can only be made on Termination, Retirement, Specified age, incapacitation, etc.
·       Gratuity paid during lifetime is part of Salary either taxable or exempt.
 
Answers to Queries Raised:
1.             What would be the status of ABC gratuity fund trust?’
The rights and liabilities of ABC in gratuity fund trust will move to Merg Co
2.             Can Merg Co close gratuity fund or trust?
Yes, with consent of employees. As gratuity is an employment benefit, either it will be replaced with better or alternative benefit or the employer/employee has to terminate the employment contract.
3.             Can Merg Co refuse to pay to fund for maintaining required balance according to actuarial valuation?
No, not unilaterally. Liabilities of ABC must be carried on. If the Trust deed binds the employer for contribution, then no alteration can be made without Commissioner consent. Trust deed can only be for management of fund, with out any binding on employer contribution – please check the document.
 
4.             Does Merg Co has right to appoint new trustees of fund?
Merg Co has all rights that ABC had (No more no less).
5.             Does Merg Co can make changes in trust deed to amend fund contribution clause?
Yes
6.             In case of above, is only board of trustees of fund can authorize change in trust deed or consent of all the eligible members of the fund is necessary?
With Trust members and Commissioner consent. Unless Trust deed empowers otherwise to Board of Trustees, in which case Commissioner Inland Revenue Approval will still be needed.
7.             Can Merg co freeze fund at any cut off date?
Not unilaterally, this is reduction in employee compensation package / benefit, this has to be done with employee consent or replaced with alternate equal benefit that can be monthly, annual or end of service.
a.             In above case when members will be paid their respective amounts
As per agreement with employees and Commissioner Approval for Income Tax liability
b.      If paid on subsequently at time of termination of services, what will happen to profits on investments made by fund and how these will be treated (or allocated)
The liability of employer to employees is limited  (as per gratuity calculation), any excess amount in fund belongs to employer, unless trust deed otherwise specified.
8.             In case it is decided to abolish trust altogether, what will happen to the funds available on cut off date and does member will?
a.             Be paid till cut off time on date of closing of fund
Employee rights are arising out of employment contract, not Trust deed unless Trust deed specifies otherwise.
b.            If a. is applied, what would be tax implications for members, as this will be before termination of services of employee
Any payment out of approved Gratuity fund is exempt. The Trust registered with Commissioner Inland Revenue is Irrevocable as per law. Funds in Trust and Trust itself are distinct. A Trust can continue without assets (let say it can receive funds in future or when a Trust is established it is not necessary that it has funds on day ONE). Abolish may mean withdrawal of Commissioner Approval which will make payment taxable.
c.             Any exemption option available to members or trust as whole
Second Schedule Part 1 Clause 13 (iv), General Exemption 50% of gratuity amount or Rs. 75,000 whichever is less.


Hope this helps

[Malik M Imran]

Dear Malik sb.
 
This is a very practical issue and normally happens in mergers, acquisitions, and change of shareholders / management. So Co. A and B and merged to become C.
 
Important points/concepts to kept in mind while deliberating on this matter:
·       The merged company C takes over all assets and liabilities of the merging companies.
·       The agreements of merging companies are also carried on by Company C.
·       Such agreements can be altered with consent of both parties as per agreement terms.
·       Employer and Employee relationships are also based on an agreement.
·       Employers cannot one-sided change terms of employment
·       Any change in employment terms either has to be mutual or the agreement can be terminated by either party as per terms of agreement i.e. resignation or termination.
·       Funded Gratuity is managed under a Trust; the contribution liability does not arise from Trust / establishment of Trust but from employer / employee agreement.
·       Trust registered with Commissioner Income Tax though irrevocable, but registration is meant for Income Tax benefits
·       Any changes to trust deed must be approved by Commissioner Income Tax
·       Payment under registered (CIT) Gratuity Trust can only be made on Termination, Retirement, Specified age, incapacitation, etc.
·       Gratuity paid during lifetime is part of Salary either taxable or exempt.
 
Answers to Queries Raised:
1.             What would be the status of ABC gratuity fund trust?’
The rights and liabilities of ABC in gratuity fund trust will move to Merg Co
2.             Can Merg Co close gratuity fund or trust?
Yes, with consent of employees. As gratuity is an employment benefit, either it will be replaced with better or alternative benefit or the employer/employee has to terminate the employment contract.
3.             Can Merg Co refuse to pay to fund for maintaining required balance according to actuarial valuation?
No, not unilaterally. Liabilities of ABC must be carried on. If the Trust deed binds the employer for contribution, then no alteration can be made without Commissioner consent. Trust deed can only be for management of fund, with out any binding on employer contribution – please check the document.
 
4.             Does Merg Co has right to appoint new trustees of fund?
Merg Co has all rights that ABC had (No more no less).
5.             Does Merg Co can make changes in trust deed to amend fund contribution clause?
Yes
6.             In case of above, is only board of trustees of fund can authorize change in trust deed or consent of all the eligible members of the fund is necessary?
With Trust members and Commissioner consent. Unless Trust deed empowers otherwise to Board of Trustees, in which case Commissioner Inland Revenue Approval will still be needed.
7.             Can Merg co freeze fund at any cut off date?
Not unilaterally, this is reduction in employee compensation package / benefit, this has to be done with employee consent or replaced with alternate equal benefit that can be monthly, annual or end of service.
a.             In above case when members will be paid their respective amounts
As per agreement with employees and Commissioner Approval for Income Tax liability
b.      If paid on subsequently at time of termination of services, what will happen to profits on investments made by fund and how these will be treated (or allocated)
The liability of employer to employees is limited  (as per gratuity calculation), any excess amount in fund belongs to employer, unless trust deed otherwise specified.
8.             In case it is decided to abolish trust altogether, what will happen to the funds available on cut off date and does member will?
a.             Be paid till cut off time on date of closing of fund
Employee rights are arising out of employment contract, not Trust deed unless Trust deed specifies otherwise.
b.            If a. is applied, what would be tax implications for members, as this will be before termination of services of employee
Any payment out of approved Gratuity fund is exempt. The Trust registered with Commissioner Inland Revenue is Irrevocable as per law. Funds in Trust and Trust itself are distinct. A Trust can continue without assets (let say it can receive funds in future or when a Trust is established it is not necessary that it has funds on day ONE). Abolish may mean withdrawal of Commissioner Approval which will make payment taxable.
c.             Any exemption option available to members or trust as whole
Second Schedule Part 1 Clause 13 (iv), General Exemption 50% of gratuity amount or Rs. 75,000 whichever is less.


Hope this helps

Salam. So many thanks Ather Sb on above answers. Much apprciated.