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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

Part I: Normal Tax

23N. Limitation of interest deductions in respect of reorganisation and acquisition transactions

 

(1)        For the purposes of this section—

 

‘acquired company’

means—

(a) a transferor company or a liquidating company that disposes of assets pursuant to a reorganisation transaction; or
(b) a company in which equity shares are acquired by another company in terms of an acquisition transaction;

 

‘acquiring company’

means—

(a) a transferee company contemplated in the definition of ‘intra-group transaction’ in section 45(1);
(b) a holding company contemplated in the definition of ‘liquidation distribution’ in section 47(1); or
(c) a company that acquires an equity share in another company in terms of an acquisition transaction;

 

‘acquisition transaction’

means any transaction—

(a) in terms of which an acquiring company acquires an equity share in an acquired company that is a company as contemplated in paragraph (a) or (b) of the definition of 'acquisition transaction' in section 24O(1); and
(b) as a result of which that acquiring company, as at the end of the day of that transaction, becomes a controlling group company in relation to that acquired company;

[Definition amended by section 40(1) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

‘adjusted taxable income’

means taxable income—

(a)        reduced by—

(i) any amount of interest received or accrued;
(ii) any amount included in the income of a person as contemplated in section 9D(2);
(iii) any amount recovered or recouped in respect of an allowance contemplated in this Act in respect of a capital asset as defined in section 19; and

(b)        with the addition of—

(i) any amount of interest incurred;
(ii) any amount allowed as a deduction in terms of this Act in respect of a capital asset as defined in section 19 for purposes other than the determination of any capital gain or capital loss;

[Subparagraph (ii) amended by section 38(1)(b) of Act No. 43 of 2014]

(iii) 75 per cent of the receipts or accruals derived from the letting of any immovable property; and

[Subparagraph (iii) amended by section 38(1)(c) of Act No. 43 of 2014]

(iv) any assessed loss or balance of assessed loss allowed to be set off against income in terms of section 20;

[Subparagraph (iv) inserted by section 38(1)(d) of Act No. 43 of 2014]

 

‘average repo rate’

in relation to a year of assessment means the average of all ruling repo rates determined by using the daily repo rates during that year of assessment;

 

‘interest’

means interest as defined in section 24J;

 

‘issue’

in relation to a debt, means the creation of a liability to pay or of a right to receive an amount in terms of that debt;

 

‘reorganisation transaction’

means—

(a) an intra-group transaction as defined in section 45(1) to which section 45 applies; or
(b) a liquidation distribution as defined in section 47(1) to which section 47 applies;

 

‘repo rate’

means the interest rate at which the South African Reserve Bank enters into a repurchase agreement contemplated in section 10(1)(j) of the South African Reserve Bank Act.

 

(2) Where an amount of interest is incurred by an acquiring company in terms of a debt—
(a) directly or indirectly assumed or applied for the purpose of procuring, enabling, facilitating or funding the acquisition by that acquiring company of any asset in terms of a reorganisation transaction;
(b) used directly or indirectly for the purpose of redeeming, refinancing or settling the debt contemplated in paragraph (a);
(c) issued, assumed or used in terms of an acquisition transaction; or
(d) used directly or indirectly for the purpose of redeeming, refinancing or settling the debt contemplated in paragraph (c),

the amount of interest allowed to be deducted must not exceed the amount determined in terms of subsection (3).

[Subsection (2) amended by section 38(1)(e) of Act No. 43 of 2014]

 

(3) The amount of interest allowed to be deducted in terms of all debts owed as contemplated in subsection (2), in respect of any year of assessment in which the acquisition transaction or reorganisation transaction is entered into and in respect of five years of assessment immediately following that year of assessment, must not exceed the sum of—
(a) the amount of interest received by or accrued to the acquiring company; and
(b) a percentage calculated in terms of the amount of the adjusted taxable income of that acquiring company in accordance with the formula contemplated in subsection (4) determined in respect of the year of assessment—
(i) in which the acquisition transaction or reorganisation transaction is entered into;
(ii) in which the amount of interest is incurred by that acquiring company; or
(iii) prior to the year of assessment contemplated in subparagraph (i),

whichever is the highest,

reduced by any amount of interest incurred by the acquiring company in respect of debts other than debts contemplated in subsection (2).

[Subsection (3)(b) amended by section 38(1)(f) of Act No. 43 of 2014]

 

(4) The percentage contemplated in subsection (3)(b) must be determined in accordance with the formula—

A= B ×

C

D

in which formula—

(a) ‘A’ represents the percentage to be determined;
(b) ‘B’ represents the number 40;
(c) ‘C’ represents the average repo rate plus 400 basis points; and
(d) ‘D’ represents the number 10,

but not exceeding 60 per cent of the adjusted taxable income of that acquiring company.

[Subsection (4) amended by section 38(1)(g) of Act No. 43 of 2014]

 

(5) This section does not apply to any interest incurred by an acquiring company in respect of any debt contemplated in subsection (2) where that interest is incurred in respect of a linked unit in the acquiring company and that interest accrues to a long-term insurer as defined in the Long-term Insurance Act, a pension fund, a provident fund, a REIT or a short-term insurer as defined in the Short-term Insurance Act, if—
(a) the long-term insurer, pension fund, provident fund, REIT or short-term insurer holds at least 20 per cent of the linked units in that acquiring company;
(b) the long-term insurer, pension fund, provident fund, REIT or short-term insurer acquired those linked units before 1 January 2013; and
(c) at the end of the previous year of assessment 80 per cent or more of the value of the assets of that acquiring company, reflected in the annual financial statements prepared in accordance with the Companies Act for the previous year of assessment, is directly or indirectly attributable to immovable.

[Subsection (5) inserted by section 42(1) of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016) - effective 31 December 2015]