Interpretation Note 75 (Issue 4): Exclusions from the Definition of Group of Companies in Section 41(1)

The ability for corporate groups to acquire businesses that fit their proposed models, divest in order to right-size or realise returns, and introduce capital from various sources is of increasing importance in today’s economic climate.

1 Sep 2022 6 min read Tax & Exchange Control Alert Article

The corporate roll-over relief provisions contained in Part III of Chapter 2 of the Income Tax Act 58 of 1962 (Act) provide corporate groups with the agility to reorganise to meet the exigencies of the prevailing economic realities. These provisions achieve this by allowing corporate groups to reorganise by deferring the otherwise immediate income tax and capital gains consequences associated with certain transactions.

The application of aspects of the corporate roll-over relief and several other provisions in the Act, in many instances turns on whether the companies in question form part of the same “group of companies” as defined in the Act. In the context of these provisions, there are two sets of rules to be considered in determining whether a “group of companies” indeed exists. The first consideration is the general definition of “group of companies” contained in section 1(1) and the second consideration is the exclusions of certain companies and shares from the determination as provided for in the more limited definition of “group of companies” in section 41(1).

The South African Revenue Service (SARS), on 18 August 2022 issued an update to Interpretation Note 75: Exclusion of Certain Companies and Shares From a “Group of Companies” as Defined in Section 41(1) (IN75). This interpretation note provides updated guidance on how to determine whether a set of companies indeed form part of the same “group of companies”. No significant changes have been made to the guidance provided, but IN75 now caters for amendments which were made to the Act following promulgation of amendments introduced under the 2021 tax laws and tax administration laws amendment process.

Group of Companies” Definitions in the Act

Section 1(1) provides that a Group of Companies exists where one company (the controlling group company) directly or indirectly holds shares in at least one other company (the controlled group company), where:

  • at least 70% of the equity shares in each controlled group company are held by the controlling group company directly, one or more other controlled group company or any combination of the preceding; and
  • the controlling group company holds at least 70% of the equity shares in at least one controlled group company.

This definition in sum provides that a “group of companies” exists where there is a top holding company that holds at least 70% of the equity shares in one or more second level subsidiaries. It further includes in that group any other subsidiary company down the ownership chain, where either a group subsidiary or the top holding company, alone or together, hold at least 70% of the equity shares.

It is important to note for the purposes of this definition, that equity shares are defined in section 1(1) as “any share in a company, excluding any share that, neither as respects dividends nor as respects returns of capital, carries any right to participate beyond a specified amount in a distribution”.

Section 41 in turn defines a “group of companies” with reference to the definition in section 1(1) noted above, but contains a proviso excluding certain categories of companies from the determination whether such company forms part of such group and that deems equity shares held in certain circumstances to not be equity shares and therefore excluded from consideration in whether the 70% threshold is met.

The categories of companies to be excluded are:

  • all co-operatives;
  • associations formed in South Africa for a specific purpose, beneficial to the public or a section of the public;
  • the portfolio of an investment scheme carried on outside of South Africa, comparable to a collective investment scheme, where members of the public are able to contribute and hold a participatory interest in such portfolio through shares, units or another form of participatory interest;
  • non-profit companies as defined in the Companies Act 71 of 2008;
  • companies where any amount constituting gross income of whatever nature would be exempt from tax under the provisions of section 10; this would include government entities, and pension funds pension preservation funds, provident funds, provident preservation funds or retirement annuity funds;
  • public benefit organisations or recreational clubs approved by SARS under the provisions of section 30 or 30A;
  • foreign incorporated companies, unless effectively managed in South Africa; and
  • locally incorporated companies that are effectively managed outside of South Africa.
  • the circumstances in which shares will be deemed to not constitute equity shares are:
  • where the shares are held as trading stock; and
  • where any person is under a contractual obligation to sell or purchase the relevant share, or has an option to sell or purchase the relevant share, unless that obligation or option provides for the sale or purchase to take place at the market value of such share at the time of the sale or purchase.

Highlights of the IN75 Guidance

IN75 emphasises that the exclusions contained in the proviso to the definition of “group of companies” in section 41(1) must be read together with the preceding wording which refers to the definition in section 1(1). Meaning that for the purposes of the section 41(1) definition, the exclusions must be read as applying to the definition of “group of companies” is section 1(1).

For example, where a company that is an approved public benefit organisation or a foreign incorporated company constitutes the controlling group company under the definition in section 1(1), such company must be excluded for the purposes of the section 41(1) definition. The exclusion of the controlling group company from the consideration could therefore possibly result in the group not constituting a “group of companies” as defined in section 41(1).

IN75 also considers the applicability of Article 24(5) of the Organisation for Economic Cooperation and Development’s Model Tax Convention on Income and Capital, which prohibits more burdensome tax treatment applying to resident subsidiaries held by non-resident holding companies, than resident subsidiaries not held by a non-resident holding company, where the circumstances are similar.

The conclusion drawn by IN75 is that the proviso to the definition in section 41(1) does not treat foreign held subsidiaries in a more burdensome manner, because the policy basis for the exclusion is that the exclusions target companies that do not fall within the South African tax net. The exclusions therefore also target resident companies which are not subject to tax in South Africa, such as approved public benefit organisations and pension funds pension preservation funds, provident funds, provident preservation funds or retirement annuity funds.


The policy rationale for the exclusion of certain categories of companies and shares from the definition of “group of companies” in section 41(1) is that the companies and shares targeted would erode the South African tax base in a manner not aligned to the policy imperatives of National Treasury.

It is therefore possible that in future further amendments may be made to the Act, seeking for the section 41(1) definition of a “group of companies” to be applied in more circumstances than at present. Aiming to prevent the provisions of the Act applying in circumstances where base erosion is a policy consideration.

Overall, an appreciation of the scope of the definition of “group of companies” in section 41(1) is critical to a proper understanding of the availability of corporate roll-over relief for a given set of companies. It is also important for the correct application of several other provisions within the Act, for example the debt concession or compromise provisions contained in section 19 and paragraph 12A of the Eighth Schedule to the Act.

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