Revisions to the definition of “value-shifting arrangement” in the context of group reorganisation transactions

The notion of shifting value between shareholders of a company is generally a concern of revenue authorities in that, once a value shift takes place, one shareholder receives the benefit of value in the company at no or a reduced cost, while the other shareholder relinquishes value, notwithstanding there being no disposition event for tax purposes, or the transaction being deemed neutral under the ITA.

21 Feb 2024 2 min read Special Edition Budget Speech Alert 2024 Article

The two notable anti-avoidance provisions targeting value shifting are contained in Paragraph 11(1)(g) of the Eighth Schedule to the ITA and section 24BA of the ITA. The latter deals with exchange transactions to a company transferee whereby the exchange transaction does not take place on a value-for-value basis.

The former deals with the deemed disposition value-shifting arrangement whereby a person who enters into an arrangement that meets the definition of “value-shifting arrangement”, as defined in Paragraph 1 of the Eighth Schedule, could trigger a capital gains tax liability, notwithstanding there being no ‘active’ disposal of an asset. National Treasury has proposed an amendment to this “value-shifting arrangement” definition.

In the context of group reorganisation transactions, the definition of “value-shifting arrangement” read with Paragraph 11(1)(g) makes it clear that the capital gains tax event takes place for a holder of an interest in a company if all the following conditions are met:

  • there must be an existing shareholder in a company;
  • there must be a change in the interest or entitlements of the existing shareholder in the company following an arrangement; and
  • the market value of the existing shareholder’s interest or entitlement must decrease pursuant to the event;

If the above happens, either of the following further conditions must be met:

  • the value of any existing interest in the company (held directly or indirectly) of a “connected person” (as defined in Paragraph 1 of the Income Tax Act) in relation to the existing shareholder must increase pursuant to the event; or
  • a “connected person” in relation to the existing shareholder must acquire a direct or indirect interest in that company.

National Treasury has recognised that under the present construct of the “value-shifting arrangement” definition, consolidating a group of companies might lead to a scenario where the market value of a current shareholder in one entity within the group decreases while another entity’s recently acquired shareholding increases, potentially triggering the value-shifting provisions. National Treasury has stated that this circumstance could arise even when:

  • the transactions are considered tax-neutral under the corporate rollover relief provisions; or
  • the market value of the ultimate holding company’s combined direct and indirect interests in all the subsidiary companies remains unchanged.

As a result, National Treasury proposes that the definition of “value-shifting arrangement” be amended to exclude certain corporate rollover transactions between groups of companies or where the value of the effective interest of the connected person in question remains unchanged. It will be interesting to see what form this amendment will take with reference to the fact that section 41(2) of the ITA (being the preamble provision to the rollover relief provisions) provides that the provisions of Paragraph 11(1)(g) of the Eighth Schedule will apply notwithstanding the corporate rollover relief provisions.

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