On March 13 2013 the South African Revenue Service released a draft interpretation note to provide guidance on the interaction between the definitions of 'group of companies' in Sections 1(1) and 41(1) of the Income Tax Act (58/1962).
The definition of 'group of companies' is of particular importance in respect of Section 45, which provides for the transfer of assets between group companies without triggering any taxes.
The draft interpretation note provides that the definition in Section 1(1) must first be applied to the relevant companies in question. Once it has been established that these constitute a 'group of companies' as defined in Section 1(1), Section 41(1) should subsequently be applied.
The definition of 'group of companies' in Section 41(1) excludes certain companies from being group companies for the 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 Section 1. Taking Section 41(1) into account, the definition in Section 1 should then be re-applied – in respect of only the remaining companies and eligible equity shares. Where the remaining companies fall within the definition of a 'group of companies' in Section 1, they will constitute a 'group of companies' for the purposes of the special rules relating to companies.
The draft interpretation note does little to ease the difficulties encountered in interpreting the awkwardly worded definition of 'group of companies' in Section 1 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 in Section 1(1):
- 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; and
- 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 definitions in Sections 1 and 41(1) compounds the complexity. While the wording of the definitions and their interaction are not patently incomprehensible, it might be worthwhile revisiting the legislation for the sake of simplicity.
For further information on this topic please contact Heinrich Louw or Danielle Botha at Cliffe Dekker Hofmeyr Incby telephone (+27 11 562 1000), fax (+27 11 562 1111) or email (firstname.lastname@example.org or email@example.com).
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