Recent amendments contained in the 2011 Draft Taxation Laws Amendment Bill ("DTLAB") propose bringing about widespread changes. Part III of the Income Tax Act No. 58 of 1962 ("the Act") that deals with roll-over relief provisions is no exception. While some flexibility has been granted with regard to the restructuring of, and in particular with regard to offshore companies, a substantial restriction has also been introduced on the unbundling of controlled foreign companies ("CFC").

In terms of section 46 the Act, two types of shares can be unbundled, either shares of a South African tax resident company, or shares in a CFC. Shares of a foreign company which does not constitute a CFC cannot be unbundled in terms of section 46.

The only manner in which an unbundling can be done to a wide body of shareholders, that is, not in the context of a group of companies and/or narrowly held companies, is where the South African unbundling company is a listed company and the shares of the unbundled company are listed or will be listed in South Africa within 12 months after that unbundling transaction.

Where a South African resident listed company wishes to unbundle its interests in foreign subsidiaries that are CFCs, the shares in the foreign entities will normally be held through a single international holding company. The shares in this company can then be unbundled and the offshore holding company will be the unbundled company for purposes of section 46 of the Act. The South African resident unbundling company can unbundle its interest in the unbundled company to its shareholders provided that the unbundled company is inward listed in South Africa within 12 months from the date of the unbundling.

Clause 76 of the DTLAB, however, proposes an amendment to section 46 that will exclude shares in CFCs to avail of the listed unbundling alternative. If these proposals are enacted, shares in a non-resident company will only be capable of being unbundled within a group of companies, which group will be determined with reference to section 41, but ignoring the exclusion of non-residents as contemplated in paragraph (i)(ee) of the definition of a "group of companies" in section 41. A South African listed company's ability to unbundle shares to a broader shareholder base, that is, to non-group shareholders, will therefore, with effect from 1 January 2012, effectively be restricted to the unbundling of shares in a resident company.

This proposed restriction will severely curtail the ability of South African listed groups, with foreign interests, to unbundle its international operations on a tax neutral basis.

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