The new Companies Act introduces changes to existing company law
principles. However, what is not widely understood is the effect
these changes will have on existing income tax principles.
For years the existing Companies Act has been critical in
understanding the tax consequences of. amongst other things,
company distributions. For example, in understanding whether a
distribution made by a company is a dividend and therefore tax
exempt or a distribution of capital and therefore subject to
capital gains tax in the hands of the shareholder.
However, once the new Companies Act has been introduced there
will be provision made for no par value shares, which will mean
these shares do not have a share premium account It may therefore
no longer be possible to identify whether a distribution which a
company makes to its shareholders arises from its share premium
account or, for example, from profits. It will simply be classified
as a distribution from a company law perspective.
However, there is a critical tax difference between a
distribution from profits (tax exempt dividends for the shareholder
and secondary tax on companies for the declaring entity) and a
distribution from the company's share premium account (taxable
capital gain for the shareholder).
Many other provisions of the Income Tax Act also refer to
company law principles which will be amended or abolished under the
new Companies Act. These include the provisions of section 8E of
the Income Tax Act which recharacterises tax exempt dividends as
taxable interest in respect of dividends declared on certain types
of redeemable preference shares.
These provisions are triggered by the declaration of a dividend.
However, this reference is to die existing company law concept as
opposed to the new concept of "distribution" to be
introduced by the new Companies Act The secondary tax on company
provisions also contain certain references to a company making a
formal declaration of a dividend, which will fall away under the
new Companies Act.
In addition the new Companies Act will introduce the concept of
merging companies. This is not properly dealt with in terms of the
Income Tax Act When a company merges with another, for example, it
is not dear from an income tax perspective whether and to what
extent any party receives "proceeds". This is a critical
point in determining the capital gains tax consequences of such a-
There are transitional measures in the new Companies Act which
provide for the retention of a share premium account Further, the
2010 Budget mentioned that work is being done on transitional
amendments to the Income Tax Act in order to deal with the new
concepts introduced by the Companies Act.
However, time is running out in respect of the introduction of
such amendments. It will also be difficult for the South African
Revenue Service (SARS) to predict and deal with all the potential
implications of the new Companies Act on the Income Tax Act.
To further muddy the waters, the Income Tax Act is also
undergoing major surgery in terms of the much anticipated
replacement of secondary tax on companies with dividends tax. The
2010 budget did not provide a date on which this replacement will
become effective. It is therefore Hkery that companies will have to
deal with a threestage process, namely, the current status quo with
the existing Companies Act and Income Tax Act followed by the
introduction of the new legislation and finally by the amendments
to the Income Tax Act.
When the Companies Act is amended there will be significant
mismatches between company law and tax law concepts. Companies
should therefore be careful in terms of analysing the tax
implications of any company distributions as well as merger and
acquisition activity after the introduction of the new Companies
Act and before the amendments to the Income Tax Act introducing
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Act has brought about fundamental changes in the manner in which shareholder resolutions are passed.
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