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
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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