When two become one, there are tax benefits

When dealing with mergers and acquisitions, the one question that always arises is what tax relief, if any, exists for companies that are contemplating a merger?

An amalgamation is essentially the joining of businesses that operate in different entities. Any such amalgamation is governed firstly by the Companies Act 71 of 2008 as well as the Income Tax Act 58 of 1962 (“Income Tax Act”). Unfortunately, this regulatory framework for amalgamations is not always cohesive and the requirements prescribed by these statutes would both need to be addressed to ensure the valid execution of an amalgamation. For the purposes of this article, we will focus on amalgamations in terms of the Income Tax Act and the tax relief it offers.

In terms of section 44 of the Income Tax Act, tax relief is granted to South African resident companies that amalgamate in accordance with this section. The prescribed procedure is that a South African resident company (the “amalgamated company”) transfers assets to another resident company (the “resultant company”) in exchange for equity shares in the resultant company. The amalgamated company must then transfer the equity shares it acquired in the resultant company to its shareholders, following which the amalgamated company must be liquidated, wound-up or deregistered.

The appeal of an amalgamation is that, if implemented correctly, the transaction will be tax neutral. In other words, it will not trigger any immediate tax consequences as a result of the disposal of assets from the amalgamated company to the resultant company. The tax relief includes the following:

The amalgamated company is considered to have disposed of the asset at base cost or tax value, depending on the nature of the asset and the resultant company and the amalgamated company will be considered as the same person for acquisition purposes. Accordingly, no capital gains tax will be triggered.
No securities transfer tax will be payable for the transfer of shares in an amalgamation transaction.
No transfer duty will be payable where a property is transferred as part of an amalgamation transaction.
In the event that both the amalgamated company and the resultant company are registered as VAT vendors, any transfer of assets will be deemed to be a non-supply.
It is vital however to remember that the tax relief will only apply if the amalgamation is implemented in accordance with the provisions of section 44 of the Income Tax Act and this will require that you consult your corporate or tax advisor to ensure that you implement the amalgamation correctly and are able to reap the tax benefits indicated above.

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy has been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s).

July 15, 2022
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