Amalgamation transactions unpacked

• Date: 01 September 2014
• Published date: 01 September 2014
• DOI: 10.10520/EJC173379
• Author: Michael Rudnicki
• Pages: 31-37

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© SIBER INK

Amalgamation Transactions

Unpacked

MICHAEL RUDNICKI

ABSTRACT

Section 44 of the Income Tax Act governs one of the six so-called corporate

roll-over relief provisions. The section provides relief for South African tax

resident companies seeking to merge with each other whereby businesses are

transferred to the merged entity. The article examines the consequences of

an amalgamation, merger or conversion of South African tax resident entities

and unpacks the eligibility for qualif‌ication. The disposal of assets by an ‘amal-

gamated company’ to a ‘resultant company’ and the applicable tax relief

afforded to both parties is discussed. The section requires consideration in

the form of equity and debt for the acquisition of assets from the amalga-

mated company. The term ‘debt’ is not def‌ined in the section, which causes

complexity where going-concern businesses are transferred with the assump-

tion of contingent liabilities. The article also deals with the tax position of the

shareholders of amalgamated companies who are required to exchange their

shares for shares in the resultant company.

INTRODUCTION

The provisions of section 44 of the Income Tax Act1 (‘the Act’) seek to create

tax neutrality among two or more companies (and related shareholders)

where assets are disposed of and acquired in terms of an amalgamation,

conversion or merger. The roll-over relief provisions provided for in section

44 will apply to the transfer of assets from one SA resident entity (‘the amal-

gamated company’) to another SA resident entity (‘the resultant company’).

The roll-over relief will also apply to the disposal of shares in the amalga-

mated company (‘AC’) in exchange for shares in the resultant company

(‘RC’), and to the distribution of shares held by the AC in the RC to its share-

holders. In summary, the transfer in rights and obligations will, in totality,

be tax neutral. This article discusses the tax implications for the respective

parties to an amalgamation transaction (see illustrative example below).

AMALGAMATION TRANSACTION CRITERIA

Three essential criteria need to be met in order for a transaction to qualify

as an amalgamation transaction:

(i) The disposal by a resident company (the AC) of all of its assets to

another resident company (the RC) effected in terms of an ‘amalgama-

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58 of 1962.