1 August 2019 by and Tax & Exchange Control Alert

In alignment: Proposed amendments pertaining to amalgamation transactions

The Income Tax Act, No 58 of 1962 (IT Act) provides for corporate roll-over relief in respect of the transfer of assets between companies that form part of the same economic unit, as well as those transfers made to shareholders who are natural persons. In order to avoid the abuse of these provisions, the legislature has incorporated numerous requirements and anti-avoidance provisions into the IT Act that must be adhered to in order for taxpayers to qualify for the relief.

However, an incongruency exists between the provisions of the Act and the operation of the Companies Act, No 71 of 2008 (Companies Act) in respect of specific types of transactions, as a result of which an amendment to the IT Act has been proposed in the 2019 Draft Taxation Laws Amendment Bill (Draft TLAB).

The incongruency

Section 44 of the IT Act, dealing with amalgamation transactions, and s47, dealing with transactions relating to the liquidation, deregistration or winding up of a company, both require that a company entering into a s44 or s47 transaction, whose existence is intended to cease must, within 36 months after the date of the transaction, take any of the steps contained in s41(4) of the IT Act to liquidate, wind-up or deregister the company. The failure to do so would prohibit the parties to the transactions from benefiting from the roll-over relief provided for in s44 and s47.

However, the provisions of s41 outlining the steps to be taken by such a company do not have regard to the provisions of s116(5)(b) of the Companies Act. This section in the Companies Act provides for the deregistration of a company by operation of law once a notice of amalgamation or merger has been furnished to the Companies and Intellectual Property Commission (CIPC).

As s41 does not provide for the deregistration of a company in terms of s116(5)(b) of the Companies Act, it has resulted in certain amalgamation transactions being excluded from the tax relief provided for in the IT Act.

The proposed amendment and reason for change

The Draft TLAB proposes an amendment to s41(4)(b) of the IT Act, which describes the steps that may be taken by a company in order for the company to be regarded as having taken steps to deregister. Specifically, it has been proposed that the scope of the steps to be taken to deregister a company be broadened to include the deregistration of a company by operation of law in terms of s116 of the Companies Act. The Explanatory Memorandum to the Draft TLAB explains that the change is necessary in order to ensure that statutory amalgamations and mergers are not unfairly excluded from benefitting from the tax neutral transfer of assets in terms of the IT Act.

Comment

While the proposed amendment to s41(4) has not yet been made final, the change will be welcomed by many taxpayers who are party to statutory amalgamation or merger transactions. It is also preferred that South African statutes work in conjunction with each other.

We remind our readers that the public now has the opportunity to submit comments regarding this proposed amendment to National Treasury and the South African Revenue Service before 23 August 2019.

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