Two types of “persons” function in society; natural persons (human beings) and juristic persons (legal entities like companies. close corporations and trusts). Property can be held by both. The following is an overview of the different legal entities in which one can own property in Namibia.
Legal entities differ from one another and each has a unique relationship between the entity and the individuals (jockeys) that own, manage and represent them. Each of them has different risks and advantages and all of them have the same rights as natural persons. For example, a company can own property, employ people, make profits, pay tax, sue people, as well as be sued, just like a natural person.
Some of the main advantages of using entities as a “property owning vehicle” are multiple ownership, perpetual existence and limited liability when it comes to creditors. Limited liability is the protection which the independent legal entity offers to its members or directors in the event of it being sued. Claims are made against the company and the assets which are owned by the company, and not against the personal assets of the members or directors. However, no protection is offered in case of statutory exceptions; if the members/directors were negligent, fraudulent, misrepresented them or has signed personal surety.
Depending on the structure of the entity it may hold in tax benefits. However, companies and close corporations in Namibia are taxed at a standard rate of 35% which one should keep in mind if you expect the property to generate income. Besides that, the biggest disadvantages are “red tape” and expenses to register and maintain these entities, as well as the lack of privacy. When purchasing property in the name of a legal entity like company, close corporation or trust, transfer duty is payable at 12%. *
When advertisements show the “sale” of immovable property as “being in a CC” or perhaps in a company or trust, the idea is that the property is not sold “out” of the entity, but the property rather “change hands” as the current shareholders or members are being replaced by new ones. The alternative is to simply buy the property and register it in your own name. In the former case the Title Deed at the Deeds Registry is not re-recorded since the property is not sold, but it is merely a “change of hands” with regard to the directors of the company, members of a closed corporation, or beneficiaries of the trust. Basically it means that the rights and obligations of the entity that owns the property become your rights and obligations.
The “seller” must at all times be held to his responsibilities to ensure that financial records and statuary annual statements and revenue filings are up to date. These requirements are often not up to date and it should be stipulated in the deed of sale that any costs thereof could be recovered from the seller. It would indeed be imprudent to buy a CC without having had insight into the statements. From those the “new members” will have knowledge of the claims and loan accounts of the CC which they are buying. Taking over a CC would mean that the new members need to ensure the completion of the financial statements up to date. In practice we often find that this is not done and when one starts to follow up on the annual financial statements, it is often the first time members find out about the statutory requirements. It must be clearly understood that there will be serious statutory responsibilities as well as personal liabilities of members who do not adhere to it. This includes that members of a close corporation are responsible for ensuring that the financial statements fairly present the state of affairs and results of the operations of the corporation at the end of the financial year concerned.
Therefore; before putting pen to paper, potential new members should always insist upon seeing the latest financials. Although there may be certain warranties which relates to the affairs of the CC, it is cold comfort to have purchased the CC and afterwards learn that the warranty regarding the books and records have failed. By that stage the new members will have parted with their money and may simply be left with a claim against a “seller”. It is also advisable to obtain the latest assessment from the Taxation Authorities to confirm that there are no nasty tax surprises.
In the sale of company shares on the other hand, the purchaser will be concerned that the company has undisclosed liabilities. The possibility also exists that purchasers cannot see the "skeletons in the closet" and there is, for instance, no certain way of knowing exactly what debts the entity has. The buyer often has no other option than to pay the bill so as not to jeopardise the entity. This of course causes a lot of frustration for the buyer that could have been avoided had he been informed beforehand.
The Title Deed (owner’s copy as well as at the Deeds Registry) details the original amounts of mortgage bonds registered against the title. These bonds should either be cancelled or amended and therefore it is important that those sale transactions be done by a conveyancer.
*An adjustment to the sliding scale for transfer duties applicable on natural persons as well as duties applicable in respect of the acquisition of real estate by legal entities (Companies, Close Corporations etc.) were recently published in the Government Gazette, duties applicable on legal entities rose from 8% to 12%
Although companies and the laws relating to them are complicated, they are useful and play an important part in the Namibian economy. A company has a legal personality separate from its members or directors. This means that the company will not be affected by changes in directors and/or shareholders. Although the company will continue to exist as a legal entity upon the death of a shareholder, the shares remain an asset in the purchaser’s estate.
A company owns its own assets and is responsible for its own debts which mean creditors can normally not act against the natural persons behind the company, with the exception again of surety in a personal capacity and certain statutory exceptions. A private company may have up to 50 shareholders, while a public company may have an unlimited number of shareholders. Annual income tax returns as well as audited financial statements are required.
Property transactions involving companies are generally more complex than those concluded by Close Corporations or individuals. The company's articles must be examined as they might provide, for example, that only the board of directors may enter into a contract of sale of immovable property on behalf of the company. In such a case, a single director will not be authorised to represent the company unless he/she is authorised by the board of directors to do so. The person representing the company can either be an authorised person within the company or an authorised outsider.
Conversion from a private company to a close corporation:
A difficulty may arise when the purchaser needs to obtain a mortgage bond on the property in order to pay the purchase price. In terms of Section 38 of the Company's Act, no company is allowed to give financial assistance for the purpose of acquiring any shares of the company. This in real terms means that where the company is a property-owning company, the purchaser cannot raise a bond on that property in order to pay the purchase price. The bond will be void and every director will be guilty of an offence. Such a purchaser can only bond the property to the extent of the seller's loan account in the company. To get around this prohibition, the company may be converted to a close corporation if the shareholders do not exceed 10 in number and qualify for membership in terms of the Close Corporations Act, as there is no similar prohibition in the Close Corporation's Act.
Only upon such a conversion being registered in the company’s office will a registration number be allocated to the corporation by the Registrar of Companies.
In terms of the Companies Act, upon such a conversion the existing shareholders in the company will become the new members in the corporation in accordance with the shareholding in the company; no new
members can be admitted on conversion. The name of the company will likewise become the name of the new close corporation. A certificate is issued that the corporation was converted from a company and a new CC1 (Close Corporation founding statement) is registered. There will therefore not be any existing documents reflecting the close corporation number until such conversion is registered.
If there is a new name to be allocated to the corporation, such name should first be approved by the Registrar of Companies/Close Corporations.
Close Corporation (CC)
A CC could be regarded as the “little brother” of the company and is much simpler and quicker to form and administer than companies. Although annual income tax returns are required the law does not require annual audited financial statements for the corporation. A close corporation may have a maximum of ten members (natural persons only) and has its own legal persona separate from its members, irrespective of change of members.
CCs are currently popular “property-owning vehicles” because of the easy setup procedures, as well as the procedure to sell a CC when the intention is to sell the property belonging to the CC. Up to date the sale of members’ interest (with the intention to actually sell the property) does not attract transfer duty in Namibia. This could mean substantial savings to the purchaser who prefers to buy the CC (with the property in it), rather than buying the property outright (it could also develop into a situation where sellers ask more for the property because of this advantage). However, should there be changes in the Transfer Duty and tax legislation it would lead to a decline in the use of CCs for the purpose of holding property. Should these limitations arrive in Namibia, CCs may become a less attractive vehicle for holding property.
Generally any member of a CC may conclude a contract on behalf of the CC. However, an Association Agreement may restrict one or more members and the consent (in writing) of a member holding a member's interest of at least 75%, or of members holding together at least that percentage of the members’ interests in the CC, shall be required for any acquisition or disposal of immovable property by the corporation - unless an association agreement provides otherwise.
A partnership is a basic relationship, based on an agreement, between two or more persons (but not more than 20) who intend to make and share profits through joint business endeavours, where each of them agrees to contribute something (either money or skills) to the business. Although a partnership has no separate persona from the partners, for property transactions and registrations it is treated as a separate entity or persona. Any partner can conclude an agreement that binds the partnership. Where persons enter into a contract in their capacity as partners, it must clearly be stated to such effect. For a person married in community of property, who obtained real rights or immovable property in the name of a partnership, the joint estate (of his/her marriage) shall not be affected thereby. The husband or wife is only involved therein in the capacity as a partner. If a partner concludes a contract on behalf of the partnership which is outside the scope of the partnerships business, the partnership will not be bound.
A trust appears to be a vague concept not as easily understood as the straightforward structure of a close corporation or company. A trust is not a juristic person, which means the law basically looks through the entity to what is behind it. The income of a trust is taxed at a rate applicable to an individual at varying income levels, not at a flat rate charged on companies and CCs. A trust is not owned by any person. It has neither shareholders nor members. A trust exists when the creator (the founder; who wants to create benefits for another) hands over, or is bound to hand over the ownership of an asset which, or the proceeds of which, is to be administered by another (trustee) in his/her capacity as such, on behalf and for the benefit of a third person (beneficiary) - or for the purpose of a charitable cause. A specific characteristic of this “arrangement” between the trustee and the founder whereby the trust is created is the fact that the trustee acts not in his/her private capacity but rather in his/her official capacity.
Ownership of assets does not belong to an individual but rather vests in the trustees and the benefits are for the beneficiary (third person). This is without the beneficiary really having a say or control of the assets. Occasionally it does happen that the “owner” wishes to sell the property and instead of transferring it to the purchaser in the normal manner, “transfer” of the property will be affected by the beneficiaries of the trust and his/her trustees resigning and new trustees being appointed. The new trustees will usually include the “purchaser” and a person or persons sympathetic to that person. The new “purchaser” would usually pay the previous “owner” an amount equivalent to what the property would normally fetch on the open market, together with some consideration for the saving in transfer costs. These techniques, known as "the sale of a Trust", are primarily used to legally evade the payment of duties and costs. It is conceivable that where there are minor beneficiaries, these beneficiaries may later have a claim against the trustees should the "sale" of the trust later prove to be the beneficiary's detriment.
Trusts are specifically designed for their intended purposes and there are uncertainties and several risks involved which means that a trust may not necessarily be the suitable property owning vehicle for residential property. The ideal property to own through a trust is a holiday home or perhaps agricultural land, intended to be used by several generations over many years and unaffected by possible changes in trusteeship or amendment of beneficiaries.
The Sole Proprietorship
A sole proprietorship is a one-man business, operated in respect of relatively small enterprises which require few to no registration at all. An example would be an informal trader or an estate agent operating on his/her own. A sole proprietor is not an independent legal entity and there is no legal protection against claims. If the sole proprietor is thus sued in his/her personal capacity, his/her personal assets will be at stake. As proprietor of the business the owner carries the full risk in respect of the business which may result in the sequestration of the owner and in the event of such owner being married in community of property, the estate of his/her spouse also.
Ownership by virtue of a land title may be held by a natural person, or by a partnership, or by a company, close corporation, trust or any other legal entity. If you are uncertain whether to purchase and hold property in your personal name or which entity to make use of, please contact us to provide you with the necessary guidelines before you continue to sign the sales agreement.