Definition In COA
An amalgamation or merger is defined in s1 of the COA and means a transaction, or series of transactions, pursuant to an agreement between two or more companies, resulting in:
(a) the formation of one or more new companies, which together hold all of the assets and liabilities that were held by any of the amalgamating or merging companies immediately before the implementation of the agreement, and the dissolution of each of the amalgamating or merging companies; or
(b) the survival of at least one of the amalgamating or merging companies, with or without the formation of one or more new companies, and the vesting in the surviving company or companies, together with such new company or companies, of all of the assets and liabilities that were held by any of the amalgamating or merging companies immediately before the implementation of the agreement”.The new provisions therefore contemplate a scenario where there is either the formation of a new company (with the dissolution of the old amalgamating or merging companies) or the survival of one of the amalgamating or merging companies.These new provisions have a far wider application and scope than the previous provisions.
Definition In ITA
Unfortunately, the specific tax roll-over relief offered in s 44 of the ITA has not been amended to align with the new COA provisions.The Standing Committee on Finance (SCOF)2 did not accept the comment made to Parliament that the amalgamation rules have not been amended in line with s 40 of the COA.The Report states that the Act caters for different types of amalgamations(citing "amalgamations, conversions and mergers”).Accordingly, the purpose of the amalgamation rules in the ITA differs from that of the COA as "these Acts seek to achieve diverse aims”.
The Taxation Laws Amendment Act No. 24 of 2011 inserted further rules in the definition of "amalgamation transactions”, which deal with foreign companies.The proviso to the definition of amalgamation transactions has been moved to form part of the exclusions list in subs (14)(g).The requirement for the termination of the amalgamated company’s existence remains unaltered, though. The current definition of an amalgamation transaction means any transaction–(a) (i) in terms of which any company (hereinafter referred to as the ‘amalgamated 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) to another company (hereinafter referred to as the ‘resultant company’) which is a resident, by means of an amalgamation, conversion or merger;and (ii) as a result of which that amalgamated company’s existence will be terminated”.Section 44 of the ITA therefore contemplates a scenario only where a company disposes of all of its assets to another company by means of amalgamation, conversion or merger and as a result of which that amalgamated company’s existence is terminated.This is similar to the scenario contemplated in para (a) of the amalgamation definition of the COA.Therefore, if one considers implementing an amalgamation transaction contemplated in para (b) of the amalgamation definition of the COA, the relief offered under s 44 of the ITA will not be available to the various parties concerned.
The conversion of the shares held in the amalgamating company into shares in the amalgamated company may trigger CGT or income tax consequences for the shareholders.The disposal of assets by the amalgamating companies to the newly amalgamated company may trigger CGT as well as normal tax on any recoupments on those assets for the amalgamating company itself.
Fortunately,s 44(9) states that the distribution of the equity shares acquired in terms of the amalgamation transaction to the shareholders of the amalgamated company will not be subject to STC (or the new dividends tax). In addition, the distribution will not be subject to securities transfer tax, due to the fact that s 8(1)(a) of the Securities Transfer Act provides an exemption where, in terms of any corporate rule transaction, a person acquires the beneficial ownership of a security.
In addition, the relief offered under s 44 of the ITA is limited to the instances where the amalgamating company transfers all of its assets to another company in return for equity shares in that company.If consideration other than equity shares is received for the assets,it may trigger the part-disposal provisions of CGT.
Para 76A of the Eighth Schedule of the ITA provides that if a shareholder receives a capital distribution on shares (for example, a distribution which is not subject to STC) then the amount of the capital distribution is treated as proceeds for a part-disposal of the shares.The base cost that may be deducted from the proceeds is determined by the apportionment rules of para 33.It is hoped that SARS will address these issues and will properly align the amalgamation and merger provisions of the COA and the ITA.The next instalment will discuss the tax implications of the modernised business rescue regime.
Source: By Lee-Ann steenkamp (TaxTALK)