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BPR 193 Debt reduction by way of set-off

Monday, 29 June 2015   (0 Comments)
Posted by: Author: BDO South Africa
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Author: BDO South Africa

SARS issued Binding Private Ruling 193 (‘BPR 193') on 15 June 2015, which deals with repayment of shareholder loans by way of a set-off between a resident South African company and its foreign holding company. The ruling is not clear on whether the Applicant is solvent, especially since the shares issued by a debtor in a set-off situation as described below have little or no market value, and a strong argument can be made that debt reduction has substantively taken place.

The holding company previously extended a shareholder loan to the Applicant, which the Applicant used to acquire working capital and allowance assets. The amount owed by the Applicant to its holding company in terms of the shareholder loan includes capital and interest. Resulting from the Applicant's cash flow position and credit rating, and thin capitalisation considerations, the parties decided to reduce the amount owing by the Applicant. The parties intended to give effect to the loan reduction through set-off.

The question arises whether set-off will trigger the Income Tax debt reduction provisions. BPR 193 ruled that the set-off would fall into ‘debt reduction' where:

  1. The holding company demands repayment of a portion of the loan (capital and interest);
  2. The holding company subscribes for 1 ordinary share in the Applicant with a par value of R1 at a premium. The subscription amount, equal to the portion of debt due, remains owing by the holding company to the Applicant on loan account;
  3. When the subscription agreement becomes unconditional, the amounts of the corresponding loan accounts (shareholder loan and subscription loan) are set-off; and
  4. The Applicant issues the ordinary share to the holding company whilst the portion of the shareholder loan remains unsettled.

BPR 193 did not deal with withholding tax on interest which may apply, since set-off could constitute payment, i.e. the interest and capital owing in terms of the loan were repaid by way of set-off.

Binding private rulings legally only bind SARS and the taxpayer concerned on the conditions and assumptions set out in that ruling. Taxpayers wanting certainty on debt reduction should obtain binding private rulings.

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