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Income Tax Act, 1962 (Act 58 of 1962)

Chapter II: The Taxes

PART III: Special rules relating to asset-for-share transactions, substitutive share-for-share transactions, amalgamation transactions, intra-group transactions, unbundling transactions and liquidation distributions

44. Amalgamation Transactions

 

(1)        For the purposes of this section -

 

‘amalgamation transaction

means any transaction –

(a)        

(i) in terms of which any company (hereinafter referred to as the ‘amalgamated company’) which is a resident disposes of all of its assets (other than assets it elects to use to settle any debts incurred by it in the ordinary course of its trade and other than assets required to satisfy any reasonably anticipated liabilities to any sphere of government of any country and costs of administration relating to the liquidation or winding-up) to another company (hereinafter referred to as the ‘resultant company’) which is resident, by means of an amalgamation, conversion or merger; and

[Subparagraph (i) amended by section 57(a) of Act No. 43 of 2014]

(ii) as a result of which the existence of that amalgamated company will be terminated;

(b)        

(i) in terms of which an amalgamated company which is a foreign company disposes of all of its assets (other than assets it elects to use to settle any debts incurred by it in the ordinary course of its trade and other than assets required to satisfy any reasonably anticipated liabilities to any sphere of government of any country and costs of administration relating to the liquidation or winding-up) to a resultant company which is a resident, by means of an amalgamation, conversion or merger;

[Subparagraph (i) amended by section 57(b) of Act No. 43 of 2014]

(ii) if, immediately before that transaction, any shares in that amalgamated company are held as capital assets; and
(ii) as a result of which the existence of that amalgamated company will be terminated; or

(c)        

(i) in terms of which an amalgamated company which is a foreign company disposes of all of its assets (other than assets it elects to use to settle any debts incurred by it in the ordinary course of its trade and other than assets required to satisfy any reasonably anticipated liabilities to any sphere of government of any country and costs of administration relating to its liquidation or winding-up) to a resultant company which is a foreign company, by means of an amalgamation, conversion or merger;

[Subsection (1)(c)(i) substituted by section 55 of the Taxation Laws Amendment Act, 2016 (Act No. 15 of 2016)]

(ii)        if—

(aa)        immediately before that transaction-

(A) that amalgamated company and that resultant company form part of the same group of companies (as defined in section 1);
(B) that resultant company is a controlled foreign company in relation to any resident that is part of the group of companies contemplated in subitem (A); and
(C) any shares in that amalgamated company that are directly or indirectly held by that resultant company are held as capital assets; and
(bb) immediately after that transaction, more than 50 per cent of the equity shares in that resultant company are directly or indirectly held by a resident (whether alone or together with any other person that is a resident and that forms part of the same group of companies as that resident); and

(iii)        as a result of which the existence of that amalgamated company will be terminated.

 

‘company’ in section 1;

 

‘qualifying interest’

[deleted by Act No. 24 of 2011 of the Taxation Laws Act].

 

 

(2)        Where an amalgamated company disposes of –

(a)        a capital asset in terms of an amalgamation transaction to a resultant company which acquires it as a capital asset –

(i) the amalgamated company must be deemed to have disposed of that asset for an amount equal to the base cost of that asset on the date of that disposal; and
(ii) that resultant company and that amalgamated company must, for purposes of determining any capital gain or capital loss in respect of a disposal of that asset by that resultant company, be deemed to be one and the same person with respect to–
(aa) the date of acquisition of that asset by that amalgamated company and the amount and date of incurral by that amalgamated company of any expenditure in respect of that asset allowable in terms of paragraph 20 of the Eighth Schedule; and
(bb) any valuation of that asset effected by that amalgamated company as contemplated in paragraph 29(4) of the Eighth Schedule:

Provided that this paragraph does not apply to any asset disposed of in terms of an amalgamation transaction contemplated in paragraph (b) of the definition of 'amalgamation transaction' if, on the date of that disposal, the market value of that asset is less than the base cost of that asset

(b) an asset held by it as trading stock in terms of an amalgamation transaction to a resultant company which acquires it as trading stock –
(i) that amalgamated company must be deemed to have disposed of that asset for an amount equal to the amount taken into account by that amalgamated company in respect of that asset in terms of section 11(a) or 22(1) or (2); and
(ii) that amalgamated company and that resultant company must, for purposes of determining any taxable income derived by that resultant company from a trade carried on by it, be deemed to be one and the same person with respect to the date of acquisition of that asset by that amalgamated company and the amount and date of incurral by that amalgamated company of any cost or expenditure incurred in respect of that asset as contemplated in section 11(a) or 22(1) or (2):

Provided that this paragraph does not apply to any asset disposed of in terms of an amalgamation transaction contemplated in paragraph (b) of the definition of 'amalgamation transaction' if, on the date of that disposal, the market value of that asset is less than the amount taken into account in respect of that asset in terms of section 11(a) or 22(1) or (2)

 

(3)        Where an amalgamated company disposes of –

(a) an asset that constitutes an allowance asset in that amalgamated company’s hands to a resultant company as part of an amalgamation transaction and that resultant company acquires that asset as an allowance asset –
(i) no allowance allowed to that amalgamated company in respect of that asset must be recovered or recouped by that amalgamated company or included in that amalgamated company’s income for the year of that transfer; and
(ii) that amalgamated company and that resultant company must be deemed to be one and the same person for purposes of determining the amount of any allowance or deduction–

(aa)        to which that resultant company may be entitled in respect of that asset; or

(bb) that is to be recovered or recouped by or included in the income of that resultant company in respect of that asset;
(b) a contract to a resultant company as part of a disposal of a business as a going concern in terms of an amalgamation transaction and an allowance in terms of section 24 or 24C was allowable to that amalgamated company in respect of that contract for the year preceding that in which that contract is transferred or would have been allowable to that amalgamated company for the year of that transfer had that contract not been so transferred –
(i) no allowance allowed to that amalgamated company under those sections must be included in that amalgamated company’s income for the year of that transfer; and
(ii) that amalgamated company and that resultant company must be deemed to be one and the same person for purposes of determining the amount of any allowance –
(aa) to which that resultant company may be entitled under those sections; or
(bb) that is to be included in the income of that resultant company under those sections.

[Paragraph (b) amended by section 63(1)(a) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

(4) The provisions of subsections (2) and (3) will not apply to a disposal of an asset by an amalgamated company to a resultant company as part of an amalgamation transaction to the extent that such asset is so disposed of in exchange for consideration other than—
(a) an equity share or shares in that resultant company; or
(i) the assumption by that resultant company of a debt of that amalgamated company, that—
(ii) was incurred by that amalgamated company—
(aa) more than 18 months before that disposal; or
(bb) within a period of 18 months before that disposal, to the extent that the debt—
(A) constitutes the refinancing of any debt incurred as contemplated in subparagraph (aa); or
(B) is attributable to and arose in the ordinary course of a business undertaking disposed of, as a going concern, to that resultant company as part of that amalgamation transaction; and
(iii) was not incurred by that amalgamated company for the purpose of procuring, enabling, facilitating or funding the acquisition by that resultant company of any asset in terms of that amalgamation transaction.

 

(4A) For purposes of the definition of ‘contributed tax capital’, if the resultant company issues shares in exchange for the disposal of an asset in terms of an amalgamation transaction, the amount received by or accrued to the resultant company as consideration for the issue of shares is deemed to be equal to an amount which bears to the contributed tax capital of the amalgamated company at the time of termination contemplated in paragraph (a)(ii) of the definition of "amalgamation transaction" subsection (1), the same ratio as the value of the shares held in the amalgamated company at that time by shareholders other than the resultant company bears to the value of all shares held in the amalgamated company at that time:  : Provided that where the amalgamated company is a portfolio of a collective investment scheme in property, the price at which the participatory interests were issued shall be added to the contributed tax capital in respect of the class of shares issued by the resultant company.

 

(5) Where the resultant company acquires any asset from the amalgamated company in terms of an amalgamation transaction that was subject to subsection (2) or (3) and that resultant company disposes of that asset within a period of 18 months after so acquiring that asset and

(a)        that asset constitutes a capital asset in the hands of that resultant company –

(i) so much of any capital gain determined in respect of the disposal of that asset as does not exceed the amount that would have been determined had that asset been disposed of at the beginning of that period of 18 months for proceeds equal to the market value of that asset as at that date, may not be taken into account in determining any net capital gain or assessed capital loss of that resultant company but is subject to paragraph 10 of the Eighth Schedule for purpose of determining an amount of taxable capital gain derived from that gain, which taxable capital gain may not be set off against any assessed loss or balance of assessed loss of that resultant company; or
(ii) so much of any capital loss determined in respect of the disposal of that asset as does not exceed the amount that would have been determined had that asset been disposed of at the beginning of that period of 18 months for proceeds equal to the market value of that asset as at that date, must be disregarded in determining the aggregate capital gain or aggregate capital loss of that resultant company for purposes of the Eighth Schedule: Provided that the amount of any capital loss so disregarded may be deducted from the amount of any capital gain determined in respect of the disposal during that year or any subsequent year of assessment of any other asset acquired by that resultant company from that amalgamated company in terms of that amalgamation transaction; or

(b)        that asset constitutes –

(i) trading stock in the hands of that resultant company, so much of the amount received or accrued in respect of the disposal of that trading stock as does not exceed the market value of that trading stock as at the beginning of that period of 18 months and so much of the amount taken into account in respect of that trading stock in terms of section 11(a) or 22(1) or (2) as is equal to the amount so taken into account in terms of subsection (2)(b): Provided that this subparagraph does not apply to any asset that constitutes trading stock that is regularly and continuously disposed of by that resultant company; or
(ii) an allowance asset in the hands of that resultant company, so much of any allowance in respect of that asset that is recovered or recouped by or included in the income of that resultant company as a result of that disposal as does not exceed the amount that would have been recovered had that asset been disposed of at the beginning of that period of 18 months for an amount equal to market value of that asset as at that date,

must be deemed to be attributable to a separate trade carried on by that resultant company, the taxable income or assessed loss from which trade may not be set off against or added to any assessed loss or balance of assessed loss of that resultant company.

 

(6)        

a) This subsection applies where any person that holds an equity share in an amalgamated company acquires an equity share in the resultant company by virtue of that shareholding and pursuant to an amalgamation transaction in respect of which subsection (2) or (3) applied—
i) as either a capital asset or trading stock, in the case where that equity share in the amalgamated company is held as a capital asset; or
ii) as trading stock in the case where that equity share in the amalgamated company is held as trading stock.
b) The person contemplated in paragraph (a) is deemed, subject to paragraphs (d) and (e), to have—
i) disposed of the equity share in that amalgamated company for an amount equal to the expenditure incurred by that person in respect of that equity share which is or was allowable in terms of paragraph 20 of the Eighth Schedule or taken into account in terms of section 11 (a) or 22 (1) or (2), as the case may be;
ii) acquired the equity share in the resultant company on the date on which that person acquired the equity share in the amalgamated company for a cost equal to the expenditure incurred by that person as contemplated in subparagraph (i);
iii) incurred the cost contemplated in subparagraph (ii) on the date on which that person incurred the expenditure in respect of the equity share in the amalgamated company, which cost must be treated as—
aa) an expenditure actually incurred by that person in respect of those equity shares for the purposes of paragraph 20 of the Eighth Schedule, if those equity shares in the resultant company are acquired as capital assets; or
bb) the amount to be taken into account by that person in respect of those equity shares for the purposes of section 11 (a) or 22 (1) or (2), if those equity shares in the resultant company are acquired as trading stock; and
iv) done any valuation of the equity share in the amalgamated company which was done by that person within the period contemplated in paragraph 29 (4) of the Eighth Schedule, in respect of the equity share in the resultant company.
c) An equity share in the resultant company that is acquired by the person contemplated in paragraph (a) is deemed not to be an amount transferred or applied by the amalgamated company for the benefit or on behalf of that person in respect of the share held by that person in that amalgamated company.
d) Where the person contemplated in paragraph (a) becomes entitled to any consideration other than any equity share in the resultant company, the provisions of paragraph (b) must not apply in respect of the part of the equity share held by that person in the amalgamated company which bears the same ratio to that share as the amount of that other consideration bears to the amount of the full consideration in respect of that share.
e) Where the person contemplated in paragraph (a) becomes entitled, by virtue of the equity share held by that person in the amalgamated company, to any consideration other than any equity share in the resultant company, so much of the amount of that other consideration as does not exceed the market value of all the assets of the amalgamated company immediately before the amalgamation, conversion or merger less—
i) the liabilities; and
ii) the sum of the contributed tax capital of all the classes of shares,

of the amalgamated company immediately before the amalgamation, conversion or merger must, for the purposes of the definitions of “dividend”, “foreign dividend”, “foreign return of capital” and “return of capital” in section 1, be deemed to be an amount transferred or applied by that amalgamated company for the benefit or on behalf of that person in respect of the share held by that person in the amalgamated company.

 

(7) [Subsection (7) deleted by the Taxation Laws Amendment Act, 2013 (Act No. 31 of 2013)]

 

(8) Where an amalgamated company disposes of any equity shares in a resultant company that were acquired by that amalgamated company in terms of an amalgamation transaction that was subject to subsection (2) or (3), to a shareholder of that amalgamated company as part of that amalgamation transaction, that amalgamated company must disregard that disposal for purposes of determining its taxable income or assessed loss.

 

(9) Where an amalgamated company disposes of any equity shares in a resultant company that were acquired by that amalgamated company in terms of an amalgamation transaction that was subject to subsection (2) or (3), to a shareholder of that amalgamated company as part of an amalgamation transaction –
(a) [Subsection (9)(a) deleted by the Taxation Laws Amendment Act, 2013 (Act No. 31 of 2013)]
(b) any shares acquired by a company in terms of that disposal must be deemed not to be a dividend which accrued to that company for the purposes of section 64B(3).

 

(9A)        [Subsection (9A) deleted by the Taxation Laws Amendment Act No. 7 of 2010]

 

(10)        [Subsection (10) was deleted by the Taxation Laws Amendment Act, 2013 (Act No. 31 of 2013) Government Gazette 37158 dated 12 December 2013]

 

(11)        [Subsection (11) deleted by Act No. 24 of 2011 of the Taxation Laws Amendment Act]

 

(12)        [Subsection (12) deleted by the Revenue Laws Amendment Act, 2007 (Act No. 35 of 2007)]

 

(13)        The provisions of this section do not apply where the amalgamated company—

(a) has not, within a period of 36 months after the date of the amalgamation transaction, or such further period as the Commissioner may allow, taken the steps contemplated in section 41(4) to liquidate, wind up or deregister; or
(b) has at any stage withdrawn any step taken to liquidate, wind up or deregister that company, as contemplated in paragraph (a), or does anything to invalidate any step so taken, with the result that the company will not be liquidated, wound up or deregistered:

Provided that any tax which becomes payable as a result of the application of this subsection may be recoverable from the resultant company.

 

(14)        The provisions of this section do not apply—

(a) in respect of any transaction that constitutes a liquidation distribution as defined in section 47(1);
(b) in respect of any transaction if the resultant company is a company contemplated in paragraph (c) or (d) of the definition of 'company';
(bA) in respect of any transaction if the resultant company is a portfolio of a collective investment scheme in securities and the amalgamated company is not a portfolio of a collective investment scheme in securities;
(bB) in respect of any transaction if the resultant company is a portfolio of a hedge fund investment scheme and the amalgamated company is not a portfolio of a hedge fund collective investment scheme;

[Paragraph (bB) inserted by section 63(1)(b) of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

(c) in respect of any transaction if the resultant company is a non-profit company as defined in section 1 of the Companies Act;
(d) in respect of any transaction contemplated in paragraph (a) of the definition of ‘amalgamated company’ if the resultant company is a company contemplated in paragraph (b) or (e)(ii) of the definition of 'company' and does not have its place of effective management in the Republic;
(e) in respect of any transaction if any amount constituting gross income of whatever nature would be exempt from tax in terms of section 10 were it to be received by or to accrue to the resultant company;
(f) in respect of any transaction if the resultant company is a public benefit organisation or recreational club approved by the Commissioner in terms of section 30 or 30A; or
(g) to a disposal of an asset by an amalgamated company to a resultant company—
(i) in terms of an amalgamation transaction contemplated in paragraph (a) of the definition of ‘amalgamation transaction’ where that resultant company and the person contemplated in subsection (6) form part of the same group of companies immediately before and after that disposal; or
(ii) in terms of an amalgamation transaction contemplated in paragraph (b) of the definition of ‘amalgamation transaction’ where that resultant company and the person contemplated in subsection (6) form part of the same group of companies (without regard to paragraph (i)(ee) of the proviso to the definition of ‘group of companies’ in section 41) immediately before and after that disposal,

if that amalgamated company, resultant company and person jointly so elect.