SA Budget 2020/21 – Clarifying rollover relief for unbundling transactions involving non-resident shareholders

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Author: Jerome Brink.

Generally, as a matter of tax parity within South Africas corporate tax system, the distribution of an asset (including shares) by a company to its shareholders should have the same tax impact as a company sale of the asset followed by a distribution of after-tax cash proceeds. However, section 46 of the Act makes provision for rollover relief where shares of a resident company (referred to as an unbundled company) that are held by another resident company (referred to as an unbundling company) are distributed to the shareholders of that unbundling company in accordance with the effective interest of those shareholders.

However, these unbundling transactions are subject to an anti-avoidance rule in section 46(7) of the Act aimed at limiting the extent to which taxpayers can distribute shares in resident companies to non-residents on a tax neutral basis. In simple terms, section 46(7) of the Act excludes the shareholders and the unbundling company from benefitting from the rollover relief if 20% or more of the shares in the unbundled company are, after the transaction, held by disqualified persons (including, amongst others, non-residents), either alone or together with persons connected to those non-residents.
National Treasury has identified that the current rule creates a loophole in that the 20% exclusionary rule may not apply where non-resident shareholders are not connected persons in relation to each other. In other words, non-residents may collectively hold 20% or more of the shares in the unbundled company, but to the extent that they are all independent, the anti-avoidance rule in section 46(7) of the Act would not be applicable as one would not breach the 20% threshold. To close this loophole, it has been proposed that the relevant legislation be amended to ensure that the rule applies irrespective of whether the non-resident shareholders are connected persons in relation to each other.