21 February 2019 by Special Edition Budget Speech Alert 2019

Company law vs income tax law: Amalgamations now regularised

One of the amendments proposed by the Budget aims to reconcile the incongruency that exists between South African company law and South African income tax law with regards to the deregistration or liquidation of companies that are involved in amalgamation transactions.

The Companies Act, No 71 of 2008 (Companies Act) makes provision for the amalgamation of companies in s113. In terms of this section, once one or more companies have amalgamated, the amalgamated companies are deemed to have been deregistered by operation of law. As such, there are no formalities that must be complied with in order for the company(s) to be deregistered.

Section 44 of the IT Act makes provision for the tax-neutral transfer of assets in an amalgamation transaction in terms of which one or more of the amalgamated companies involved in the amalgamation transaction ceases to exist after the transaction is concluded. For this provision to find application, numerous requirements must be met.

Of importance for purposes of this article is s44(13). This subsection states that the provisions of s44 will not apply to an amalgamation transaction where the amalgamated company(s) has not, within a period of 36 months after the date of the amalgamation transaction, taken the necessary steps (provided for in s41(4) of the ITA) to liquidate, wind-up or deregister itself. Section 41(4) makes provision for numerous procedures in terms of which an amalgamated company may take steps to cease its existence.

The incongruency that arises from the law as it currently stands is that s41(4) makes no provision for an amalgamated company to cease to exist by means of the company’s deregistration by operation of law. As such, where a company implements an amalgamation transaction in terms of s113 and in terms of which the amalgamated companies are deregistered by operation of law, such amalgamation transaction does not qualify in terms of s41(4) of the IT Act. Consequently, the amalgamated company will not be entitled to the benefit of a tax-neutral transfer of assets provided for in s44 of the ITA.

It has been proposed that the scope of the steps prescribed in s41(4) that may be taken by an amalgamated company to ensure that the said company ceases to exist, must be extended to include the deregistration of an amalgamated company by operation of law. As such, an amalgamation in terms of s113 of the Companies Act will not preclude the amalgamated companies from benefiting from the tax-neutral position provided for in s44 of the ITA. This amendment is a welcome change as it will ensure that the Companies Act and the ITA operate in conjunction with, and in support of, each other.

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