Mergers and acquisitions – know the tax benefits

Mergers and acquisitions can be a confusing process, and if not executed correctly, there is a risk of foregoing several tax relief benefits set out by the Income Tax Act 58 of 1962.

According to Wright Rose-Innes, any amalgamation is governed by the Companies Act 71 of 2008 and the Income Tax Act 58 of 1962, where an amalgamation is defined as the union of businesses that operate in different entities.

Companies must follow the requirements prescribed by both statutes accordingly to guarantee the proper execution of an amalgamation and qualify for the available tax relief benefits given below.

Income Tax Act 58 of 1962

Section 44 of the Income Tax Act grants tax relief to any South African companies that amalgamate under this section.

A merger under section 44 stipulates that a South African resident company (amalgamated company) transfers assets to another resident company (resultant company) in exchange for equity shares in the resulting company.

The amalgamated company must then transfer the equity shares it acquired in the resultant company to its shareholders. After which, the company must be liquidated, wound up or deregistered.

If implemented correctly, the transaction will be tax neutral and will not trigger any immediate tax consequences following the disposal of assets from the amalgamated company to the resultant company.

The tax relief as a result of this process includes the following:

  • No capital gains tax will be triggered as the resultant company, and the amalgamated company will be considered the same person for acquisition purposes. The amalgamated company must dispose of its assets at base cost or tax value.
  • No securities transfer tax will be payable for the transfer of shares in an amalgamation transaction.
  • No transfer duty will be payable where a property is transferred as part of an amalgamation transaction.
  • Any asset transfer will be deemed non-supply, provided that the amalgamated company and the resultant company are registered VAT vendors.

Companies must ensure that the amalgamation is implemented under the provisions of section 44 of the Income Tax Act.

Therefore, it is vital to consult a corporate or tax advisor to ensure that you implement the amalgamation correctly to reap the above tax benefits.


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