One of the amendments proposed by Budget 2019 aims to reconcile the incongruency that exists between South African company law and income tax law with regard to the deregistration or liquidation of companies that are involved in amalgamation transactions.
The Companies Act (71/2008) provides for the amalgamation of companies in Section 113. Under this section, once one or more companies have amalgamated, they are deemed to have been deregistered by operation of law. As such, there are no formalities that must be complied with for companies to be deregistered.
Section 44 of the Income Tax Act provides for the tax-neutral transfer of assets in an amalgamation transaction in terms of which one or more of the amalgamated companies involved in the amalgamation transaction ceases to exist after the transaction is concluded. For this provision to apply, numerous requirements must be met.
Section 44(13) is important here, as it states that Section 44 will not apply to an amalgamation transaction where the amalgamated companies have not, within 36 months from the date of the amalgamation transaction, taken the necessary steps (provided for in Section 41(4) of the Income Tax Act) to liquidate, wind up or deregister themselves. Section 41(4) provides for numerous procedures in terms of which an amalgamated company may take steps to cease its existence.
The incongruency that arises from the law as it currently stands is that Section 41(4) makes no provision for an amalgamated company to cease to exist by means of its deregistration by operation of law. As such, where a company implements an amalgamation transaction under Section 113 and in terms of which the amalgamated companies are deregistered by operation of law, such amalgamation transaction does not qualify under Section 41(4) of the Income Tax Act. Consequently, the amalgamated company will not be entitled to the benefit of a tax-neutral transfer of assets provided for in Section 44 of the Income Tax Act.
It has been proposed that the scope of the steps prescribed in Section 41(4) that an amalgamated company may take to ensure that it ceases to exist must be extended to include the deregistration of an amalgamated company by operation of law. As such, an amalgamation under Section 13 of the Companies Act will not preclude the amalgamated companies from benefiting from the tax-neutral position provided for in Section 44 of the Income Tax Act. This amendment is a welcome change, as it will ensure that the Companies Act and the Income Tax Act operate in conjunction with, and in support of, each other.
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