Tax Implications Arising From The New Companies Act
30 June 2011
Posted by: Author: Andrew Lewis
Tax Implications Arising From The New Companies Act
Including CGT, amongst others …
Any respite that corporate advisers enjoyed over the April public holidays was short-lived when they returned to work under a new corporate law environment,with the introduction of the new Companies Act No 71 of 2008 (the Companies Act) which came into effect on 1 May 2011.
Worth noting is that the Act has tax implications.For instance, the Companies Act has introduced the concept of a"domesticated company” which allows a foreign company to transfer its registration to South Africa, i.e. to be "domesticated”.The Companies Act also allows fora South African-registered company to transfer its place of registration to a foreign jurisdiction.
In particular, Section 13(5) of the Companies Act provides that if a foreign company transfers its place of registration to South Africa, it will thereafter exist as a company in terms of the Companies Act "as if it had been originally so incorporated and registered”.
However , a number of requirements must firstly be satisfied.For instance, a foreign company may only transfer its registration if:
• the law of the jurisdiction in which the company is registered permits such a transfer;
• the transfer has been approved by the company's shareholders;
• the whole or a greater part of its assets and undertaking are within South Africa, other than the assets and undertaking of any subsidiary that is incorporated outside South Africa; and
• the majority of the shareholders are resident in SA and the majority of the directors are (or will be) South African citizens.
Importantly, Section 13(11) of the Companies Act provides that the registration of a "domesticated company” does not inter alia establish a new juristic person or prejudice or affect the identity of the juristic person or its continuity as a juristic person. Despite the effect of this Section 13(11), i.e.that the subject company's corporate personality may continue unhindered, one should bear in mind some of the attendant tax implications.For instance:
1.One would have to consider the tax legislation of the foreign jurisdiction (and possibly the double taxation agreement) to determine whether the transfer of the foreign company's place of registration to SA will trigger any deemed disposal provisions(or other tax implications) for the foreign company;
2.On the basis that the majority of the shareholders must be SA residents, the foreign company may previously have been regarded as a controlled foreign company (CFC).
Subject to Paragraph 24 of the Eighth Schedule to the Income Tax Act No. 58 of 1962(the Act), Paragraph 12(4) of the Eighth Schedule to the Act provides that where the foreign company ceases to be a CFC as a result of becoming a"resident”, it will be treated as having disposed of its assets(save for the assets listed in subparagraph (a)(i) and (ii) of Paragraph 12(4)) and immediately reacquired them at their market value.In other words, the purpose of Paragraph12(4) (read with Paragraph 24)is to determine the base cost of the company's assets going forward.
It is noted that the deemed disposal provisions in Paragraph12(4) of the Eighth Schedule to the Act do not apply to:
• any immovable property situated in South Africa;
• an asset of a Permanent Establishment (PE) through which the CFC carried on a trade in South Africa during the year of assessment; and
• assets held by the CFC if any amount received or accrued from their disposal would have been taken into account for purposes of determining the net income of that CFC under Section 9D of the Act.
An important distinction must be made between the assets which would have been taken into account for purposes of determining the "net income” of the CFC in terms of Section 9D(the "excluded assets”) and those assets which qualify for the"foreign business establishment”exemption (FBE Assets).
SARS’ Comprehensive Guide to Capital Gains Tax (the CGT Guide) provides that the excluded assets fell within the South African tax net when the foreign company was a CFC, and therefore there is no need to trigger the deemed disposal and reacquisition provisions, i.e. the deemed disposal provisions do not apply and the excluded assets will therefore retain their historic base cost in the hands of the resident company.However, the FBE Assets did not fall within the South African tax net while the company was a CFC. Thus it is appropriate that any pre-residence unrealised capital gains and losses be excluded from the South African tax system by means of the deemed disposal rules in Paragraph 12(4) of the Eighth Schedule to the Act (which results in a market value base cost step-up of the FBE Assets in the hands of the resident company);
3. no specific legislation has been included in the Act to address the issue whether to not the transfer of the companies place of registration will trigger a disposal for the shareholders of their shares in the company.
However, based on the CGT Guide and certain Binding Private Rulings, it is submitted that a strong argument may be made that no disposal is triggered in the hands of the shareholders.In addition, Section 82 of the Companies Act provides that a company may apply to be deregistered under the Companies Act and transfer its place of registration to a foreign jurisdiction if certain requirements are satisfied.
Depending on the circumstances, a South African company transferring its place of registration to a foreign jurisdiction may cease to be a "resident” of SA (it is noted that the SA company will not necessarily cease to be a resident if its place of registration is in a foreign jurisdiction).In such instance, Paragraph 12 (read with Paragraph 13) of the Eighth Schedule to the Act provides that the company will be deemed to have disposed of its assets (save for its immovable property situated in South Africa or an asset attributable to a PE in South Africa) for an amount equal to its market value on the date immediately before the company ceased to be a resident.
The transfer of a company's place of registration may therefore trigger capital gains tax implications for the company in SA.One should thus be mindful that before a company's place of registration is transferred to or from SA under the new Companies Act all the attendant tax implications have carefully been considered by the company and its shareholders.
Source: By Andrew Lewis (Taxbreaks)