The South African Revenue Service (SARS) published Binding Private Ruling No. 198 on 7 July 2015 (Ruling). The Ruling deals with the distribution by a South African resident company (Subsidiary) of its loan account to its South African holding company (Holding Company) in anticipation of the Subsidiary’s deregistration.
The applicable provisions in the Income Tax Act, No 58 of 1962 (Act) are s10(1)(k), s47, s64D and s64FA(1)(b).
The relevant facts relating to the Ruling are as follows:
- the Holding Company wished to simplify its group structure by deregistering dormant companies within its group;
- the Subsidiary, being wholly-owned by the Holding Company, was one of the dormant companies in the group;
- the Subsidiary’s only asset was a loan owed to it by the Holding Company (Loan);
- the Loan represented the Subsidiary’s share capital and distributable reserves in its books of account; and
- the Subsidiary had no liabilities.
It was proposed that the Subsidiary distribute the Loan to Holding Company in accordance with s47 of the Act as a "liquidation distributions". It would constitute a distribution of all of the Subsidiary’s accumulated profits and a return of its share capital. The distribution would be effected in anticipation of the Subsidiary’s deregistration.
The Ruling was made subject to the following additional conditions and assumptions:
- The Subsidiary would, in accordance with s47(6)(c)(i) of the Act, within a period of 36 months from the date of the "liquidation distribution" comply with the steps contemplated in s41(4) of the Act to liquidate, wind up or deregister and would at no stage withdraw any steps to liquidate, wind up or deregister.
- The parties would not agree in writing to opt out of the provisions of s47 of the Act.
- The Subsidiary would notify the Holding Company in writing as to what amount of the "liquidation distribution" constitutes a return of capital, as contemplated in paragraph 76(4) of the Eighth Schedule to the Act.
Subject to the above conditions and assumptions, SARS ruled that:
- The distribution of the Loan by the Subsidiary to the Holding Company would qualify as a "liquidation distribution" as defined in s47(1)(a) of the Act. The disposal would accordingly fall within the ambit of s47(2)(a) of the Act (ie a disposal of a capital asset).
- The distribution of the Loan would be a dividend in specie to the extent that it is not a "return of capital" as defined in s1(1) of the Act.
- The dividend amount would be exempt from dividends tax under s64FA(1)(b) of the Act.
- To the extent that the distribution of the Loan is a "return of capital" as defined in s1(1) of the Act, the return of capital would be disregarded under s47(5)(b) in determining the Holding Company’s taxable income, assessed loss, aggregate capital gain or aggregate capital loss.
- The subsequent disposal by the Holding Company of the equity shares held by it in the Subsidiary as a result of the liquidation, winding up or deregistration must be disregarded under s47(5)(a) of the Act for the purposes of determining the Holding Company’s taxable income, assessed loss, aggregate capital gain or aggregate capital loss.
- The dividend received by the Holding Company as a dividendin specie will be exempt from normal tax under s10(1)(k)(i) of the Act.
The Ruling is valid for a period of one year from 16 May 2014.