Emil Brincker March 29 2019 Deducting interest for debt incurred during acquisition of shares Cliffe Dekker Hofmeyr | Corporate Tax - South Africa Emil Brincker Corporate Tax It has always been a contentious issue whether a purchaser of shares can claim a deduction for the interest that it incurs on monies borrowed to acquire the shares. The argument has traditionally been that the purchaser will receive dividends only in respect of the shares and these that dividends will not be taxed. Given the fact that the interest therefore generates no income, it was traditionally disallowed as a deduction.Several years ago, the legislature intervened by introducing Section 240 of the Income Tax Act. This section allows purchasers to deduct interest for a debt that is used to fund the acquisition of shares in certain circumstances. However, the target must:be an operating company; andform part of the same group of companies as the acquirer (70% equity shareholding).The problem is that the 70% shareholding may be diluted following subsequent corporate actions (ie, the introduction of a new company between the acquirer and the target or the acquisition of a new group of companies). In light of this, a new provision will be introduced, which allows parties to claim a deduction to the extent that the acquirer still holds 70% of the target on a direct or indirect basis.However, interest will be deductible only to the extent that the shares are acquired in a so-called 'operating company'. In other words, the target must already generate income as opposed to being a start-up. This intention will be made clear, which limits the scope of the section to a large extent.A number of taxpayers have also realised that the section does not substantially benefit them in circumstances where the acquirer generates no income. For instance, if a holding company acquires shares in a target and has no other taxable income, it is of little use to the holding company to be able to deduct interest. Therefore, the relevant provisions are beneficial only to the extent that an operating company acquires shares in a target, as such operating company can then set off the interest that it can claim as a deduction against other income. Otherwise the ability to deduct interest is of little value as the holding company would only generate dividends which are exempt from tax in any event.For further information on this topic please contact Emil Brincker at Cliffe Dekker Hofmeyr Inc by telephone (+27 11 290 7000) or email ([email protected]). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.