On July 24 2013 the South African Revenue Service (SARS) released Binding Private Ruling 149, dealing with the disposal by a local company of foreign assets (shares) in exchange for shares in a foreign company.
The applicant was a local company holding 100% of the issued shares in foreign Company A, which held the applicant’s various foreign investments.
Foreign Company A was incorporated in and a tax resident of the Netherlands.
The applicant wished to interpose another foreign company, foreign Company B, between itself and foreign Company A.
Foreign Company B was to be established as a cooperative that was also tax resident in the Netherlands.
The transaction entailed that the applicant would dispose of its shares in Company A to Company B at market value. As consideration, the applicant would be issued 99.99% of the equity in Company B.
Company B would record the market value of the shares received in Company A as contributed tax capital.
The remaining 0.01% of equity in Company B would be held by another group company.
SARS ruled that the transaction fell within the definition of an ‘asset-for-share transaction’ given in Section 42 of the Income Tax Act (58/1962). SARS states that the transaction would be regulated by the latter section and the parties would receive rollover relief.
In terms of Paragraph b of the definition of ‘asset-for-share transaction’, a transaction in terms of which a party (ie, the applicant) disposes of an equity share in a foreign company (Company A) to another foreign company (Company B) in exchange for an equity share in that other foreign company, can qualify for rollover relief, provided that the following requirements are met:
- Immediately before the disposal, the party (ie, the applicant) and the other foreign company (Company B) must form part of the same group of companies, and the other foreign company must be a ‘controlled foreign company’ in relation to any resident group company. In addition, the group company must also be a ‘controlled foreign company’. In the case at hand, it was assumed that this requirement was to be met by ensuring that the group company eventually holding the 0.01% stake in Company B initially held all the equity in Company B; and
- At the close of the day on which the transaction takes place, more than 50% of the equity shares in the foreign company must be held directly or indirectly by a resident, or more than 70% of the equity shares in the other foreign company must directly or indirectly be held by a resident.
It would appear that SARS was satisfied that these requirements had been met in this case.
SARS further ruled that the definition of ‘contributed tax capital’ would not apply to Company B while it remained a foreign company (a non-resident company).
SARS also ruled that the provisions relating to ‘foreign dividends’ or ‘foreign return of capital’, as defined in Section 1 of the act, would apply without any reference to contributed tax capital.
The ruling was made on the condition that profits distributed by Company B would be treated as dividends by the Dutch tax authorities, and that Company A would not be a ‘foreign financial instrument holding company’ for purposes of Paragraph 64B(5) of the Eighth Schedule to the act.