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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

47. Transactions relating to liquidation, winding-up and deregistration

 

(1)        For the purposes of this section -

‘liquidation distribution’ means any transaction –

(a) in terms of which any company (hereinafter referred to as the ‘liquidating company’) which is a resident disposes of of all its assets (other than assets it elects to use to settle any debts incurred by it in the ordinary course of its trade) to its shareholders, in anticipation of or in the course of the liquidation, winding up or deregistration of that company 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, but only to the extent to which those assets are so disposed of to another company (hereinafter referred to as the ‘holding company’) which is a resident and which on the date of that disposal forms part of the same group of companies as the liquidating company; or

[Paragraph (a) amended by section 59 of Act No. 43 of 2014]

(b) in terms of which a liquidating company which is a controlled foreign company in relation to any 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) to its shareholders in anticipation of or in the course of the liquidation, winding up or deregistration of that company-
(i) to the extent that those assets are so disposed of to a holding company which-
(aa) is a resident and which forms part of the same group of companies (as defined in section 1) as the liquidating company immediately before that distribution; or
(bb) is a controlled foreign company in relation to any resident;
(ii) if, immediately before that transaction, each of the shares held by the holding company in the liquidating company is held as a capital asset; and
(iii) if, immediately after that transaction, where that holding company is a controlled foreign company as contemplated in subparagraph (i)(bb) , more than 50 per cent of the equity shares in the holding company are directly or indirectly held by a resident (whether alone or together with any other resident that forms part of the same group of companies as that resident).

 

(2)        Where a liquidating company disposes of –

(a) a capital asset in terms of a liquidation distribution to its holding company which acquires it as a capital asset –
(i) that liquidating 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 the disposal thereof; and
(ii) that liquidating company and that holding company must, for purposes of determining any capital gain or capital loss in respect of a disposal of that asset by that holding company, be deemed to be one and the same person with respect to –
(aa) the date of acquisition of that asset by that liquidating company and the amount and date of incurral by that liquidating 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 liquidating company as contemplated in paragraph 29(4) of the Eighth Schedule; or
(b) an asset held by it as trading stock in terms of a liquidation distribution to its holding company which acquires it as trading stock –
(i) that liquidating company must be deemed to have disposed of that asset for an amount equal to the amount taken into account by that liquidating company in respect of that asset in terms of section 11(a) or 22(1) or (2), and
(ii) that liquidating company and that holding company must, for purposes of determining any taxable income derived by that holding 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 liquidating company and the amount and date of incurral by that liquidating 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 in the case of a liquidation distribution contemplated in paragraph (b) of the definition of 'liquidation distribution', this subsection does not apply to any asset disposed of in terms of that liquidation distribution to a holding company which is a resident and which forms part of the same group of companies (as defined in section 1) as the liquidating company if that asset constitutes-

(a) a capital asset acquired by the holding company as a capital asset and the base cost of that asset exceeds the market value of that asset at the time of that disposal; or
(b) trading stock acquired by the holding company as trading stock and the amount taken into account in respect of that asset in terms of section 11(a) or 22(1) or (2) exceeds the market value of that asset at the time of that disposal";

 

(3)        Where a liquidating company disposes of –

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

[Paragraph (b) amended by section 66 of the Taxation Laws Amendment Act, 2015 (Act No. 25 of 2015]

 

(3A) The provisions of subsections (2) and (3) apply to a disposal of an asset by a liquidating company to its holding company in terms of a liquidation distribution only to the extent that—
(a) equity shares held by that holding company in that liquidating company are disposed of as a result of the liquidation, winding up or deregistration of that liquidating company; and
(b) that holding company has not assumed any debt of that liquidating company which was incurred by that liquidating company within a period of 18 months before that disposal, unless that debt—
(i) constitutes the refinancing of any debt incurred in more than 18 months before that disposal; or
(ii) is attributable to and arose in the normal course of a business undertaking disposed of, as a going concern, to that holding company as part of that liquidation distribution.

 

(4) Where the holding company acquires any asset from the liquidating company in terms of a liquidation distribution and that holding 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 holding 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 holding 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 holding 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 holding 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 holding company from the liquidating company in terms of that liquidation distribution; or

(b)        that asset constitutes –

(i) trading stock in the hands of that holding 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 holding company; or
(ii) an allowance asset in the hands of that holding company, so much of any allowance in respect of that asset that is recovered or recouped by or included in the income of that holding 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 the market value of that asset as at that date, must be deemed to be attributable to a separate trade carried on by that holding 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 holding company.

 

(5)        Where—

(a) a holding company disposes of any equity share in a liquidating company as a result of the liquidation, winding up or deregistration of that liquidating company; or
(b) in anticipation of or in the course of the liquidation, winding up or deregistration of a liquidating company, a return of capital by way of a distribution of cash or an asset in specie by that company is received by or accrues to a holding company,

the holding company must disregard that disposal or return of capital for purposes of determining its taxable income, assessed loss, aggregate capital gain or aggregate capital loss.

 

6) The provisions of this section do not apply where—
a) the holding company is—
i) a public benefit organisation as defined in section 30 that has been approved by the Commissioner in terms of that section;
ii) a recreational club as defined in section 30A that has been approved by the Commissioner in terms of that section; or
iii) a person contemplated in section 10 (1) (cA), (cP), (d), (e) or (t);
b) the holding company and the liquidating company agree in writing that this section does not apply; or
bA) [Subsection (6) (bA) deleted by the Taxation Laws Amendment Act, 2013 (Act No. 31 of 2013) Government Gazette 37158 dated 12 December 2013]

c)        the liquidating company—

i) has not, within a period of 36 months after the date of the liquidation distribution, or such further period as the Commissioner may allow, taken the steps contemplated in section 41 (4) to liquidate, wind up or deregister; or
ii) has at any stage withdrawn any step taken to liquidate, wind up or deregister that company, as contemplated in paragraph (i), 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 paragraph shall be recoverable from the holding company or, where the holding company is a controlled foreign company, from any resident who directly or indirectly holds any participation rights in that controlled foreign company as contemplated in section 9D (2).