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Income Tax Act, 1962 (Act No. 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 substituted by section 40(1) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015) - effective 1 January 2016]]

 

"adjusted taxable income"

means taxable income calculated before applying this section—

[Words preceding paragraph (a) substituted by section 42(1)(a) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019]

(a)        reduced by—

(i) any amount of interest received or accrued that forms part of taxable income;

[Paragraph (a)(i) substituted by section 42(1)(b) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019]

(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

[Paragraph (a)(iii) substituted by section 38(1)(a) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014) - effective 1 January 2015)]

(b)        with the addition of—

(i) any amount of interest incurred that has been allowed as a deduction from income;

[Paragraph (b)(i) substituted by section 42(1)(c) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019]

(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;

[Paragraph (b)(ii) substituted by section 38(1)(b) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014) - effective 1 January 2015]

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

[Paragraph (b)(iii) substituted by section 38(1)(c) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014) - effective 1 January 2015]

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

[Paragraph (b)(iv) inserted by section 38(1)(d) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014) - effective 1 January 2015]

 

"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).

[Section 23N(2) substituted by section 38(1)(e) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014) - effective 1 January 2015]

 

(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) the highest of the amounts determined by multiplying the percentage determined under subsection (4) by the adjusted taxable income of the acquiring company for each of the years 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),

[Section 23N(3)(b) substituted by section 40(a) of the Taxation Laws Amendment Act, 2017 (Act No. 17 of 2017)]

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).

[Section 23N(3)(b) substituted by section 38(1)(f) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014)]

 

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

 

23N(4)

 

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.

[Section 23N(4) substituted by section 38(1)(g) of the Taxation Laws Amendment Act, 2014 (Act No. 43 of 2014) - effective 1 January 2015]

 

(5) [Section 23N(5) deleted by section 42(1)(d) of the Taxation Laws Amendment Act, 2018 (Act No. 23 of 2018), GG 42172, dated 17 January 2019 - effective 1 January 2019 and applies in respect of amounts incurred on or after that date]