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Tax Implications of New Reforms in Company Mergers
The Companies Act 71 of 2008 introduced a new regime to the South African corporate law whereby two or more companies can merge their respective assets and liabilities into one or more combined companies (we refer to this as a "statutory merger"). Taxand South Africa considers the new statutory merger and its impact on the administrative tax obligations that the parties involved have in terms of the ITA.
The reform was aimed at providing a simple and uncomplicated framework within which companies can merge. However, the South African tax legislation is not fully aligned with the Companies Act. Some key issues are:
Application of rollover relief provisions
A general misconception exists that a statutory merger necessarily qualifies for the corporate rollover relief offered to an "amalgamation transaction" in terms of section 44 of the Income Tax Act 58 of 1962 ("ITA").
Transfer of tax liabilities
One effect of the statutory merger rules is to transfer certain tax obligations to the merged entity. The commercial exposure may be intensified by the imminent Tax Administration Bill. Certain provisions of this Bill will increase tax exposures and liabilities not only for the merged entity, but also for shareholders and financial management personally.
Underlying cause of the transaction
A crucial issue is to determine the underlying cause of the fusion of assets and liabilities of parties entering into an "amalgamation or merger" transaction.
Taxand South Africa provides a more in depth view of the reform framework
Multinationals intending merger transactions should pay special attention to the attendant tax implications of their proposed transactions and not assume that the statutory merger regime has made it necessary to consider the tax effects of these transactions.