The aim of the corporate rules contained in Part III of the Income Tax Act, 58 of 1962 ("the Act") is to facilitate transactions between groups of companies or between companies and shareholders by ensuring that the transactions inherent in any restructuring occur on a tax neutral basis in South Africa.
Until recently, the corporate rules aimed to promote only onshore restructurings, as the tax relief in terms of the corporate rules only applied to the reorganisation of South Africa resident companies. However, with effect from 1 January 2012, the corporate rules facilitate, to a limited extent, offshore restructurings as well by applying to the reorganisation of non-South African resident companies. The corporate rules override the normal provisions of the Act and we set out below a summary of the relevant corporate rules contained in section 42 of the Act, dealing with 'offshore' asset-for-share transactions.
An 'offshore' asset-for-share transaction is a transaction in terms of which a person disposes of an equity share in a foreign company to another foreign company, in exchange for an equity share in that other foreign company and immediately before and at the end of the day on which the asset is disposed of:
- the person holds a qualifying interest in the other foreign company; and
- the other foreign company is a controlled foreign company in relation to any company that forms part of the same group of companies as the disposing company.
A 'qualifying interest' is defined in section 42 as:
- an equity share held by a person in a company which is a listed company, or will become a listed company within twelve months after the transaction as a result of which that person holds that share;
- equity shares held by that person in an unlisted company that constitute at least 20% of the equity shares and voting rights of a company; or
- an equity share held by a person in a company that forms part of the same "group of companies" as that person.
A 'controlled foreign company' is defined in section 9D(1) of the Act as any foreign company where:
- more than 50% of the voting rights in that foreign company are held, directly or indirectly by one or more SA tax residents; or
- more than 50% of the total participation rights in that foreign company are held, directly or indirectly, by one or more SA tax residents.
A foreign company is a company which is not a SA tax resident, such as a foreign incorporated company which is effectively managed outside of SA.
The 'offshore' asset-for-share transactions, essentially allow the restructuring of offshore companies that remain under the control of the same South African group of companies and accordingly, limits the relief on the premise that the reorganisation rollover relief should not result in the tax-free externalisation of corporate value outside the South African group.
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.