An amalgamation is the combination of two or more companies into an entirely new entity. Unlike an acquisition, where at least one company remains intact, none of the companies involved in an amalgamation survive as a legal entity. Instead, a completely new entity is formed, carrying the combined assets and liabilities of the former companies.
How Amalgamations Work
Amalgamations typically occur between two (or more) companies engaged in the same line of business or that share similarities in their operations. The process usually involves a larger entity, referred to as the “transferee” company, absorbing one or more smaller “transferor” companies before creating the new entity.
Procedure Under Section 44 of the Income Tax Act
Section 44 of the Income Tax Act provides tax relief to South African resident companies that amalgamate in accordance with this section. The standard procedure involves the following steps:
- A South African resident company (the “amalgamated company”) transfers its assets to another resident company (the “resultant company”) in exchange for equity shares in the resultant company.
- The amalgamated company must then distribute the equity shares it acquired in the resultant company to its shareholders.
- Once this process is completed, the amalgamated company must be liquidated, wound-up, or deregistered.
Tax Relief Benefits for Amalgamation Transactions
The main appeal of an amalgamation transaction is that, if implemented correctly, it does not trigger any immediate tax consequences due to the disposal of assets from the amalgamated company to the resultant company. The tax relief includes the following benefits:
- Capital Gains Tax (CGT): The amalgamated company is considered to have disposed of its assets at base cost or tax value, depending on the nature of the assets. For tax purposes, the resultant company and the amalgamated company are treated as the same person for acquisition purposes, ensuring that no capital gains tax is triggered.
- Securities Transfer Tax (STT): No STT will be payable on the transfer of shares during an amalgamation transaction.
- Transfer Duty: No transfer duty will be payable when property is transferred as part of an amalgamation transaction.
- VAT Relief: If both the amalgamated company and the resultant company are registered as VAT vendors, any transfer of assets will be deemed a non-supply, thereby not attracting VAT.
Conclusion
Amalgamation transactions under Section 44 of the Income Tax Act provide significant tax relief and operational benefits for companies looking to restructure without incurring immediate tax liabilities. By carefully adhering to the prescribed procedures, companies can take advantage of this relief and avoid common tax pitfalls during mergers and restructurings.
