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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

Part I: Normal Tax

24O. Incurral of interest in respect of certain debts deemed to be in the production of income

[Heading amended by section 46(1) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

(1)        For the purposes of this section—

 

'acquisition transaction' means any transaction in terms of which a company acquires an equity share—

(a) in another company—
(i) that is an operating company; and
(ii) as a result of which, at the end of the day of that transaction—
(aa) that company is a controlling group company in relation to that other company; and
(bb) that company and that other company form part of the same group of companies as defined in section 41(1); or
(b) in another company—
(i) that is a controlling group company in relation to an operating company that forms part of the same group of companies, as defined in section 41(1), as that controlling group company; and
(ii) as a result of which, at the end of the day of that transaction,
(aa) that company is a controlling group company in relation to that other controlling group company; and
(bb) that company and that other company form part of the same group of companies as defined in section 41(1);

 

'operating company' means a company of which—

(a) at least 80 per cent of the receipts and accruals constitute income in the hands of that company; and
(b) the income contemplated in paragraph (a) is derived—
(i) from a business carried on continuously by that company; and
(ii) in the course or furtherance of providing goods or rendering of services for consideration by that company.

 

(2)        Subject to subsections (3) and (4), where during any year of assessment a debt is issued, assumed or used by a company—

(a) for the purpose of financing the acquisition by that company of an equity share in an operating company in terms of an acquisition transaction; or
(b) in substitution for a debt issued, assumed or used as contemplated in paragraph (a),

any interest incurred by that company in respect of that debt must, to the extent to which that equity share constitutes a qualifying interest in an operating company, be deemed to have been-

(i) so incurred in the production of the income of that company; and
(ii) laid out or expended by that company for the purposes of trade.

 

(3) An equity share in a company constitutes a qualifying interest in an operating company, on the date of acquisition, if that equity share is an equity share in—
(a) an operating company; or
(b) any other company, to the extent that the value of that equity share is derived from an equity share or equity shares held by that company in an operating company or operating companies—
(i) in relation to which that company is a controlling group company; and
(ii) that form part, with that company, of a group of companies, as defined in section 41(1): Provided that if at least 90 per cent of the value of that equity share is so derived, that equity share must be treated as an equity share in an operating company.

 

(4) A determination of the extent to which an equity share acquired in terms of an acquisition transaction constitutes a qualifying interest in an operating company—
(a) must apply, for purposes of subsection (2), until any of the following events occurs in relation to a company taken into account in making that determination:
(i) a controlling group company ceases to be a controlling group company in relation to any operating company;
(ii) an operating company ceases to be an operating company; or
(iii) any company ceases to form part of the group of companies contemplated in paragraph (a)(ii) or (b)(ii) of the definition of ‘acquisition transaction’ in subsection (1); and
(b) must, if any of the events contemplated in paragraph (a) occurs, be determined as if that equity share had been acquired on the date of that event and must apply, for purposes of subsection (2), from that date.

 

[Section 24O amended by section 46(1) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]