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News & Press: Corporate Tax

Draft Interpretation Note on 'group of companies' definition

17 March 2013   (0 Comments)
Posted by: SAIT Technical
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By Danielle Botha and Heinrich Louw (DLA Cliffe Dekker Hofmeyr Tax Alert)

Executive summary

This article reflects on the recent draft Interpretation Note that provides guidance on the interaction between the definitions of 'group of companies' found in sections 1 and 41 of the Income Tax Act.

Full article

On 13 March 2013, SARS released a draft Interpretation Note (IN) to provide guidance on the interaction between the definitions of 'group of companies' as it appears in s1(1) and s41(1) of the Income Tax Act, No 58 of 1962 (Act).

The definition of 'group of companies' is of particular importance in respect s45 of the Act, which provides for the transfer of assets between group companies without triggering any taxes.

The draft IN provides that the definition in s1(1) must first be applied to the relevant companies in question. Once it is established that these do constitute a group of companies as defined in s1(1) of the Act, s41(1) of the Act should be applied.

The definition of 'group of companies' in s41(1) of the Act excludes certain companies from being group companies for purposes of the special rules relating to companies. Likewise, the definition excludes certain equity shares from being taken into account when determining whether the companies in question constitute a 'group of companies' in terms of s1 of the Act. Taking s41(1) into account then, the definition in s1 of the Act should be re-applied – obviously only in respect of the remaining companies and eligible equity shares. Where the remaining companies fall within the definition of 'group of companies' in s1 of the Act, they will constitute a 'group of companies' for purposes of the special rules relating to companies.

Unfortunately the draft IN does little to ease the difficulty encountered in interpreting the awkwardly worded definition of 'group of companies' in s1 of the Act in the first place. While the definition might appear to be concisely stated, it often requires more than one read to establish its meaning in the context of applying it to a given set of companies.

The following is a breakdown of the definition of 'group of companies' in s1(1) of the Act:

There must be two or more companies;

One company, referred to as the controlling group company, must directly or indirectly hold shares in one or more of the other companies, referred to as the controlled group companies.

The controlling group company, or one or more of the controlled group companies, whether together or alone, must hold at least 70% of the equity shares in each controlled group company, in order for that controlled group company to form part of the group.

The controlling group company must directly hold at least 70% of the equity shares in one controlled group company in order for there to be a group at all.

The circular interaction between the definition in s1 of the Act and the definition in s41(1) of the Act unfortunately compounds the complexity.

It is submitted that, while the wording of the definitions and their interaction are not patently incomprehensible, it might be worthwhile to revisit the legislation for the sake of simplicity.


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