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8/3/2019 Ma Cross-border 2010 South Africa
1/24
MERGERS AND ACQUISITIONS
South Africa
Taxation of Cross-Border
Mergers and Acquisitions
2010 Edition
TAX
8/3/2019 Ma Cross-border 2010 South Africa
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South Africa
Taxation of Cross-Border Mergers and Acquisitions 1
2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
South Africa
IntroductionThe environment for mergers and acquisitions (M&A) in
South Africa is currently far less clement than in
previous years due to the harsh current economic
climate and the global credit and liquidity crunches. The
liquidity constraints and debt burdens have reduced the
economys growth as a whole, and led to a sharp
decrease in M&A activity. This has, however, created
increased opportunities for growth in the small to
medium-sized business segment, which remains
relatively active and buoyant, and big-players are still onthe look-out for quality assets with long-term growth
potential.
Recent Developments
A number of recent developments to the South African
legislative framework have resulted in significant
changes to the M&A environment, which has in turn
resulted in some uncertainty regarding the appropriate
method of dealing with these types of transactions from
a tax and legal perspective. Among the recent
developments over the past two years, the most
pertinent are the following:
the scrapping of the secondary tax on companies(STC) and the introduction of a withholding tax
(WHT) on dividends;
the introduction of reportable arrangementlegislation, effective as of 1 April 2008;
the proposed replacement of the currentCompanies Act in its entirety (which is expected to
be effective July 2010);
the Competition Amendment Act 1 of 2009; and the repeal of the Stamp Duties Act and its
replacement by the Securities Transfer Tax Act No.
25 of 2007 and the Securities Transfer Tax
Administration Act No. 26 of 2007.
Dividends Tax
The Taxation Laws Amendment Act, No. 17 of 2009
(TLAA) promulgated on 30 September 2009, amended
the current Income Tax Act by introducing a WHT on
dividends of 10 percent on dividends declared. The
relevant provisions have been passed into law, but are
only effective from a date to be declared in the
Government Gazette.
The new dividends WHT will replace the old STC regime
under which dividends were taxed in the hands of the
company declaring the dividend and not in the hands of
the shareholder. In a bid to align the South African
regime with tax jurisdictions around the world, South
Africa introduced the dividend tax at the shareholder
level, entitling a non-resident shareholder to tax credits
in their home country.
The STC legislation currently grants an exemption from
STC in the form of STC credits, to the extent that the
dividends received during a dividend cycle exceed the
amount of dividends declared during the dividend cycle
and the company declaring the dividend has sufficient
STC credits to shelter the dividend declared against
STC. The new dividends WHT tax does not contain a
similar exemption, but taxpayers are given five years
from the date the legislation becomes effective to use
their STC credits.
The new dividends tax became law on 30 September
2009, however, it will only take effect within three
months from a date to be announced in the
Government Gazette, which is expected to be in the
second half of 2010.
Reportable Arrangements
Reportable arrangements legislation has been
introduced in South African tax law with effect from 1
April 2008. The new provisions are far wider than those
that they replace in section 76A of the Income Tax Act.
The new provisions wider in their ambit, in that they
apply to both promoters and persons deriving a tax
benefit from the arrangement. The previous version only
imposed a reporting obligation on the person deriving
the tax benefit from the reportable arrangement. A
promoter is defined in section 80T as any person who is
principally responsible for organizing, designing, selling,
financing, or managing a reportable arrangement. The
primary reporting obligation lies with the promoter.
In certain circumstances, it may be difficult to identify
the promoter of the reportable arrangement or, given
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South Africa
Taxation of Cross-Border Mergers and Acquisitions 2
2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
that the definition of a promoter cites a number of
alternative functions that may be performed in relation
to the reportable arrangement, there may be two or
more promoters. In the absence of such a written
statement, when a promoter fails to disclose the
arrangement as required, he/she could be liable for a
penalty of up to ZAR 1 million. This in itself is not a
major punitive penalty, but the reputational damage this
could cause is quite significant.
It is imperative that all parties associated with an M&A
transaction be aware of these new provisions and
conduct their actions accordingly, having regard to
appropriate disclosure of the transaction steps and the
tax consequences thereof.
Companies Act 71 of 2008
The Companies Act 71 of 2008 (the new Companies
Act) has been passed by Parliament and was signed by
the President on 8 April 2009. The earliest it can come
into force is 9 April 2010, but we understand that the
Department of Trade and Industry would like the new
Companies Act to take effect from July 2010. The new
act will replace the Companies Act 61 of 1973 (the
current Companies Act) in its entirety.
The new Companies Act introduces fundamental
changes to the current South African company law and
corporate actions. In reforming South Africas company
laws, the Governments stated objectives include
simplification the existing regime, increased flexibility,
improved corporate efficiency, transparency and
accountability, and predictable regulation.
Competition Amendment Act 1 of 2009
The Competition Amendment Act 1 of 2009 has been
passed by Parliament and was signed by the President
on 28 August 2009. Of particular importance to
business is that the Competition Amendment Act 1 of
2009 allows for criminal prosecution of directors and
managers who have either caused, or permitted a firm
to engage in cartel behavior. With the amendments, andin the light of the well-established whistle blowing
provisions, self assessment has become critical.
The amendments also introduce to our competition law
the concepts of complex monopoly conduct and market
inquiries.
The date on which the Competition Amendment Act,
2009 will be effective is still to be announced.
Securities Transfer Tax
The Stamp Duties Act, No. 77 of 1968 (the Stamp
Duties Act), required, inter alia, the registration of
transfers of unlisted securities, whereas the
Uncertificated Securities Tax Act, No. 31 of 1998 (the
UST Act) required the registration of changes inbeneficial ownership of listed securities. In practice the
two acts created anomalies and also complicated
administration. The Securities Transfer Tax Act, No. 25
of 2007 (STTA) was introduced to replace stamp duties
and UST on securities with a single tax on transfers of
listed and unlisted securities. The STTA ensures that the
rules governing both listed and unlisted securities are
consistent.
Asset Purchase or Share PurchaseThe following sections address those issues that should
be considered when contemplating the purchase of
either assets or shares.
Purchase of Assets
The decision on whether to acquire the assets of a
business or acquire the shares will depend on the
details of the transaction. The advantages and
disadvantages of both purchase mechanisms need to
be understood, if the acquisition is to be effected in the
most efficient manner, while complying with all
legislative requirements.
Asset purchases may be favored because of theinterest deductibility of funding cost and the ability to
depreciate the purchase price for tax purposes.
However, other considerations may result in an asset
purchase being far less favorable, including, inter alia, an
increased capital outlay, the inability to use the tax
losses of the target company, and no deductions or VAT
claims in respect of irrecoverable debts.
Purchase Price
When assets are purchased at a discount, no statutory
rules stipulate how the purchase price is to be allocated
among the various assets acquired. Unless the discount
can be reasonably attributed to a particular class of
asset, it should be allocated among all the assets on
some reasonable basis.
Goodwill
No provision exists for the write-off of goodwill for tax
purposes by the purchaser. Accordingly, care should be
taken to allocate the purchase price, as much as
possible, among the tangible assets, providing that such
allocations do not result in the over-valuation of any
asset.
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South Africa
Taxation of Cross-Border Mergers and Acquisitions 3
2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
Depreciation
Provisions exist for the deduction of wear and tear or
depreciation on most fixed assets. Certain assets do not
qualify for such allowances.
The current write-off periods are as follows:
Asset Years
Machinery used in a process of manufacture 40% in the year it is brought into use
20% in each of the following 3 years of assessment (only if
new and unused, otherwise allowance is 20% per year
over 5 years
Aircraft 5
Light Aircraft 4
Ships 5
Passenger Cars 5
Delivery Vehicles 4
Furniture and Fittings 6
Computers (mainframe) 5
Personal Computers 3
Buildings used in manufacturing, new and unused
commercial buildings or buildings used by hotel keepers
20
Source: KPMG in South Africa, 2008
The aggregate of allowances may not exceed the actual cost of a particular asset.
In addition to the allowances granted to taxpayers in general, farmers are entitled to write off certain farming
development expenditure. This includes dipping tanks, dams, fences, certain buildings, and roads. These write-offs,
however, may not create a tax loss. In situations where the deduction of the above items would create such a loss, the
expenditure will be carried forward to a subsequent year of assessment.
The taxation of mining operations is a complex area, but a notable feature is that capital expenditure generally is allowable
in the determination of taxable income. Certain limitations (basically relating to the source of income against which it may
be offset) exist and may delay its deduction. These provisions are beyond the scope of this summary.
The following expenses relating to intangibles and items of technological property used by a taxpayer in the normal
course of his/her business may be written off for tax purposes:
Type of Assets Period of Write-off
Premiums paid for the use of machinery, land and
buildings, motion pictures, patents, designs, trademarks,
copyrights, or similar property.
Over the period for which use has been acquired subject to
a maximum of 25 years.
Leasehold improvements (it must be a requirement of the
lease agreement to effect such improvements).
Over the period of the lease, but subject to a maximum of
25 years.
Devising, developing, or acquiring any patent, design,
trademark, copyright, or other similar property.
Actual cost if less than ZAR 5,000, otherwise 5% (per
annum) of the expenditure in the case of a patent, copyright
or similar property or 10% (per annum) of the expenditure,in the case of a design or similar property. No deduction will
be allowed with respect to any trademark or similar property
acquired on or after 1 January 2004.
Revenue expenditure on scientific research undertaken for
the development of the taxpayers business or contribution
to programs approved by the Council for Scientific and
Industrial Research and undertaken by scientific bodies.
A deduction of 150% was previously allowed of any
expenditure actually incurred, during any year of
assessment, by the taxpayer in respect of activities
undertaken in the republic.
No deduction of this nature is allowed in respect of any
expenditure incurred during any year of assessment
commencing on or after 2 November 2006.
Expenditure on scientific research that is of a capital nature
and is for the development of the taxpayers business, if
certified by the Council for Scientific and Industrial
A deduction is allowed over three years of 50%, 30%, and
20% in respect of the cost of any building, plant, machinery,
implement, utensil, and article of a capital nature brought
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South Africa
Taxation of Cross-Border Mergers and Acquisitions 4
2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
Type of Assets Period of Write-off
Research. into use for the purpose of research.
Discovery of novel, practical, non-obvious information, or
devising, developing or creating any invention, design,
computer program, or knowledge essential to the use of
such invention, design or computer program.
A deduction of 150% of the expenditure incurred, and an
accelerated capital allowances over a three year period of
50%/30%/20%.
Source: KPMG in South Africa, 2008
Tax Attributes
Tax losses cannot be passed on to the buyer of the
business. Recoupments in the company (that is, the
difference between proceeds and tax value) are taxable
in the hands of the seller if the values of certain assets
realized are in excess of their tax values.
Value-Added Tax (VAT)
When any of the income tax relief provisions apply to a
transaction, the supplier and recipient will be deemed to
be one and the same person for VAT purposes. This
implies that there is no supply for VAT purposes,
provided both the supplier and recipient are registered
as vendors for VAT purposes.
Any assets and/or liabilities excluded from the income
tax relief provisions will have to be considered
separately from a VAT perspective to determine the
applicable rate, if any.
When the income tax and VAT relief provisions are
applied, it was previously argued that vendors may
potentially not be entitled to recover VAT on the costs
incurred for the purposes of the transaction as input tax
deductions on the basis that the VAT was not incurred
for the purpose of making taxable supplies. However,
the South African Revenue Service (SARS) issued a
Draft Interpretation Note on 31 March 2009 in which it
stated that even though the transaction may not be
regarded a supply for VAT purposes, the VAT incurred
on goods and services acquired for the purpose of
making the supply may still qualify as input tax for VAT
purposes. The test to apply here is whether the vendor
would been entitled to an input tax deduction when
section 8(25) of the VAT Act does not apply. If the
answer is yes, input tax can still be claimed.
Where section 8(2) of the VAT Act does not apply and a
business, or part of a business that is capable of
separate operation, is sold as a going concern, VAT is
payable at zero rate (that is, charged with VAT, but at 0
percent) provided certain requirements are met. To
qualify for zero-rating, both the seller and the purchaser
must be registered for VAT and agree in writing that:
the business will be sold as a going concern;
the business will be an income-earning activity onthe date of transfer;
the assets that are necessary for carrying on suchenterprise are disposed of by the supplier to the
recipient; and
the price stated is inclusive of zero-rate VAT.
The contract can, nevertheless, provide that, should the
zero-rating for some reason not apply, VAT at the
standard rate will be added to the selling price.
Transfer Taxes
Transfer duty is payable by the purchaser on the
transfer of immovable property to the extent to which
the sale is not subject to VAT.
A notional VAT input credit is available to a vendor on
the purchase of second-hand property from a vendor
not registered for VAT. Where second-hand goods
consisting of fixed property are acquired wholly for the
purposes of making taxable supplies, the input tax
claimable is limited to the amount of the transfer duty
paid.
The transfer duty is payable on the greater of cost or
market value at the following rates:1
Persons other than natural persons: 8 percent
Natural person:
o On the first ZAR 500,000: 0 percento From ZAR 500,001 to ZAR 1,000,000:
5 percent of the value above ZAR 500,000
o In excess of ZAR 1,000,000: ZAR 25,000 plus8 percent of the value exceeding
ZAR 1,000,000
Purchase of Shares
Share purchases are often favored, because of their
lower capital outlay and the acquirers ability to benefit
from the acquisition of any tax losses of the target
company. Benefits can also be derived from existing
contracts within the target. However, the fact that there
1SARS 2009/2010 Budget Tax Guide
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South Africa
Taxation of Cross-Border Mergers and Acquisitions 5
2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
is no tax deduction of the funding cost of the acquisition
represents a significant barrier to this method.
Due Diligence Reviews
It is not unusual for the vendor in a large negotiated
acquisition to open the books of the target company for
a due diligence review by the prospective purchaser,
including an in-depth review of the financial, legal, and
tax affairs of the potential target company by the
advisers to the purchaser. The findings of such a due
diligence review may result in adjustments to the
proposed purchase price and the inclusion of specific
warranties made by the seller in the legal agreement.
Tax Indemnities/Warranties
In the case of negotiated acquisitions, warranties as to
any undisclosed taxation liabilities of the company are
generally required by the purchaser from the seller. Theextent of the warranties is a matter for negotiation.
When the acquisition is not negotiated, the nature of
the acquisition precludes obtaining any warranties or
indemnities.
Tax Losses
Tax losses may be retained by the purchaser when the
shares are purchased, unless any anti-avoidance rules
apply.
Crystallization of Tax Charges
The purchaser should satisfy itself that it has been
made aware of all transfers of the assets it is acquiring.
South African income tax legislation provide for roll-over
relief on the tax consequences of intra-group transfers
of assets if certain requirements are met. Each of the
intra-group provisions contain their own specific anti-
avoidance provisions, which deem the purchaser to
have disposed of the assets at their market value on the
day that certain events occur, and to have immediately
reacquired the assets at that market value. Essentially,
the purchaser becomes liable for all of the tax that was
deferred and effectively rolled over in the intra-grouptransfer.
Pre-Sale Dividend
According to the 2009 draft Explanatory Memorandum,
the new dividends WHT can create arbitrage
opportunities for company shareholders. In particular,
there is an incentive for shareholders selling shares to
convert the sale proceeds into dividends. This
conversion eliminates capital gains, subject to a 14-
percent (half of 28 percent) tax rate, with dividends that
are exempt from tax. Economically, purchaser-funded
pre-sale dividends amount to sale proceeds and are
used almost exclusively to avoid South African tax.
The changes seek to deny the shareholder arbitrage
advantage arising from arrangements involving pre-sale
dividends that are directly or indirectly funded by
purchasers. This change covers three main issues:
dividend conversions to trading stock gross income;
dividend conversions to capital gain proceeds; and
refinement of anti-avoidance rules that ensure thattax payers selling shares may not benefit from
artificial losses generated by pre-sale dividends.
Securities Transfer Tax
Since 1 July 2008, every transfer of securities is subject
to securities transfer tax (STT) as stipulated in theSecurities Transfer Tax Act No. 25 of 2007 (STTA), and
the Securities Transfer Tax Administration Act No. 26 of
2007 (STTAA). Both the STTA and STTAA came into
force on 1 July 2008. They replace the Stamp Duties
Act No. 77 of 1968.
The STTA and STTAA apply to the transfer of shares in
unlisted South African companies, shares listed on the
Johannesburg Stock Exchange, members interests in
close corporations, as well as distribution rights. STT is
levied at the rate of 0.25 percent of the taxable amount
(according to a prescribed formula which differsdepending on whether or not the securities are listed).
The STTA defines the word transfer to include the
transfer, sale, assignment, or cession or disposal in any
other manner, of securities or the cancellation or
redemption of securities, but does not include any issue
of securities. In addition, only transfers that result in a
change in beneficial ownership will attract STT.
Compromise Benefits with Creditors
Where a company that has an assessed loss enters into
a compromise benefit with any or all of its creditors,such that the amount payable to the creditor(s) is either
reduced or extinguished, any assessed tax loss brought
forward from the preceding year will be reduced to the
extent of expenditure claimed as a deduction in respect
of such loss.
Trading Stock/Contingent Liabilities
Should shares previously acquired by a company in
exchange for fixed property or shares in any other
company (the value of which was not then taxed but
deferred) and held as trading stock, be disposed of after
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South Africa
Taxation of Cross-Border Mergers and Acquisitions 6
2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
a merger or acquisition has been effected, the acquirer
will have to bear the tax liability.
Capital Gains Tax
Non-residents are subject to capital gains tax (CGT) only
on capital gains from certain South African property,
including immovable property, an interest in such
immovable property, and business assets attributable to
a permanent establishment situated in South Africa.
However, in line with international practice and double-
taxation agreements entered into by the Republic, non-
residents will not be liable to CGT on other assets, such
as shares that they own in the Republic, unless the
shares are shares in an immovable property company in
certain circumstances.
Tax Clearances
The revenue authorities will not give tax clearances topotential purchasers with respect to potential target
companies, because a taxpayers tax affairs are
confidential. Revenue may reopen an assessment up to
three years from the date of issue, and may reopen any
assessment that was incorrect due to fraud,
misrepresentation, or non-disclosure of material facts.
Choice of Acquisition Vehicle
There are a number of options available to a foreign
purchaser when deciding how to structure the
acquisition of a local resident company. The South
African Income Tax Act contains special rules relating to
asset-for-share transactions, amalgamation transactions,
intra-group transactions, unbundling transactions, and
liquidation distributions. The purpose of these provisions
is to facilitate mergers, acquisitions, and restructurings
in a tax-neutral manner. The rules are very specific and
generally do not apply cross-border, or when one of the
entities in the transaction is a not a company.
However, often the most crucial element to consider
when choosing an acquisition structure is whether to
structure the acquisition through a branch or a
subsidiary.
Local Intermediary Holding Company
The incorporation of a South African intermediary
holding company affords limited liability protection. The
intermediary holding company may separately invest in
various joint ventures rather than through one single
entity. Dividends received by the intermediary will be
exempt from STC allowing funds to be pooled at the
intermediary level for further re-investment or for
onward distribution.
Additional administrative and regulatory costs incurred
for no fiscal benefit will most likely not be tax
deductible, because the intermediary will receive no
taxable income.
Foreign Parent Company
There are generally no legal restrictions on the
percentage foreign shareholding in a South African
incorporated company. The foreign parent company
could consider charging a royalty to the South African
subsidiary where such royalty would be tax deductible
in the hands of the South African entity and where such
payment is subject to a WHT of 12 percent.
The foreign parent company could also extract profits in
the form of interest, which will be deductible in the
hands of the South African entity. There is currently no
WHT on interest paid by a South African resident to a
non-resident.
Profits could also be extracted in the form of
management fees, which should be deductible in the
hands of the South African entity and not subject to any
WHT.
Non-Resident Intermediate Holding Company
The foreign intermediary may separately invest into
various African countries and may also be subject to
foreign domestic tax anti-avoidance legislation, such as
controlled foreign company (CFC) legislation. The
intermediary would need to be established in ajurisdiction that has lower rates of WHT on dividends,
interest, management fees, and royalties than those
stipulated in the relevant double tax agreement (DTA).
Any dividends declared to the foreign intermediary will
be subject to WHT (new dividend tax), which may be
reduced by a DTA.
Local Branch
Where a group company purchases the assets of a
South African business, it may operate the business in
South Africa as a branch of the foreign company (whichmust be registered as an external company in South
Africa) or establish a local subsidiary company in South
Africa.
The South African income tax system is based on
taxable income. Taxable income is gross income
received by or accrued to a resident taxpayer, not of a
capital nature, less any exempt income and less all
allowable expenditure actually incurred in the production
of that income. Non-residents are taxed on a source
basis.
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South Africa
Taxation of Cross-Border Mergers and Acquisitions 7
2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
A local subsidiary is subject to a 28-percent corporate
tax rate, while a local branch of a foreign company will
be subject to a 34-percent tax rate.
Branch profits are not subject to any WHT on their
remittance to the foreign head office.
Resident companies are, however, subject to a
secondary tax on companies (STC). This tax is levied at
a rate of 10 percent of the net amount of any dividend
declared by a company. The net amount of a dividend is
the amount by which the dividend declared exceeds the
sum of any dividends (other than certain exempt
dividends) accruing to the company in a dividend cycle.
A dividend cycle is the period commencing immediately
after the previous dividend cycle and ending on the date
on which the dividend declared accrues to the
shareholder.
Pre-tax profits may, in certain instances, be extracted
from a local subsidiary company by a foreign holding
company by way of royalties, management fees, or
interest on loans. Such payments would, however, be
subject to transfer pricing and thin-capitalization rules,
for example, as regards the rate of interest on loans.
As a local branch is not a separate entity, expenditure
payable to its foreign head office for royalties,
management fees, and interest on loans would not
generally be allowable as a tax deduction in South
Africa.
The Income Tax Act does, however, make provision for
the deduction of expenditure and losses actually
incurred outside the Republic in the production of
income, provided that such expenditure and losses are
not of a capital nature. Therefore, when the foreign
company incurs expenditure outside the Republic in the
production of the South African branchs income, such
amounts would normally be allowed as a deduction by
the branch in computing its taxable income. The amount
of the deduction would be the actual amount of the
expenditure incurred outside the Republic, which maynot necessarily equate to the market value of the goods
or services in South Africa.
The tax rates in the foreign country versus the tax rates
in South Africa would, therefore, be an important factor
in deciding whether a local subsidiary or a local branch
of a foreign company would be more favorable from a
tax point of view, especially in view of the fact that
branches are not subject to STC.
An advantage of branches is that when more than one
branch is operating in South Africa, the losses of one
branch may be set off against the taxable income of
another branch in determining the South African income
tax payable. This set-off of losses would not apply to
companies.
External Companies
Companies incorporated in other countries, but which
have a place of business in South Africa, are referred to
as external companies. On the registration of the
memorandum of an external company the external
company shall be a body corporate in the Republic
subject to the applicable provisions of the current
Companies Act. Such companies are required by the
current Companies Act to register as external
companies, and certain provisions of the act will apply
to them.
There are two ways in which the business of an
external company may be transferred to a newly
incorporated South African company without attracting
STT. First, the external company takes steps to wind
itself up voluntarily or become dissolved for the purpose
of transferring the whole of its undertaking to a
company incorporated or to be incorporated in South
Africa. This is, in effect, a corporate migration
mechanism for inbound investment. Second, a new
South African company can acquire all the shares of the
external company. This is subject to the provision that
the sole consideration for the transfer or acquisition is
the issue of shares of the new company in proportion totheir shareholding in the external company.
Furthermore, no shares may be available for issue to
any persons other than the members of the external
company.
In both instances application must be made to the High
Court, which must be satisfied that the company carries
on its principal business in South Africa.
An external company carrying on business in the
Republic that wishes to terminate its corporate
existence in a foreign country may commence its
corporate existence in South Africa immediately,
without interruption, provided it satisfies the following
requirements of the Minister of Trade and Industry:
the whole or a major part of its business isconducted in South Africa and the greatest part of
its assets is situated in South Africa;
the majority of its directors are or will be SouthAfrican citizens;
the majority of its shareholders are resident in theRepublic;
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South Africa
Taxation of Cross-Border Mergers and Acquisitions 8
2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
its registration and incorporation in the foreigncountry will be terminated in accordance with the
laws of that foreign country;
it has lodged the necessary documents with theRegistrar of Companies and has paid all fees and
duties payable under the current Companies Act orany other act; and
it has complied with such requirements as theregistrar may deem necessary.
The minister may, subject to the above conditions being
met and with effect from the date of termination of its
registration and incorporation in the foreign jurisdiction,
effect the necessary registration in South Africa and
cancel the registration as an external company.
External Companies in Terms of the New Companies
Act
The provisions of the new Companies Act concerning
the registration of external companies do not differ
significantly from the current position as described
above, although they do stipulate (unlike under the
current Companies Act) what activities, if conducted in
the Republic, will constitute conducting business or
non-profit activities requiring the external company
engaging in such activities to register as a branch.
The procedure for registering a branch under the new
Companies Act is not entirely clear at this stage (theregulations dealing with the procedural aspects of the
new legislation have not yet been passed), but we
envisage that although the procedure may be less
onerous, it would not differ substantially from the
procedure under the current Companies Act.
Joint Ventures
When acquisitions are to be made together with other
parties, the choice of an appropriate vehicle is
important. Generally, such ventures can be conducted
through partnerships, close corporations, companies, or
trusts.
While partnerships are ideally suited for joint ventures,
the lack of limited liability, the joint and several liabilities
for debts, and the lack of separate legal existence limit
their use. When a partnership is used, its taxable
income is first determined and then apportioned
between the partners in accordance with their
respective interests.
Another vehicle that may be used is a close corporation.
A close corporation is, to all intents and purposes,
treated as a company for tax purposes. A perceived
advantage of a close corporation over a company is that
fewer statutory formalities are associated with the
former. A limitation, however, is the provision that
prohibits companies and persons other than natural
persons from having an interest in a close corporation.
While the new Companies Act will still recognizes pre-
existing close corporations, from inception of the new
Companies Act, no new close corporations will be
incorporated/registered.
Business can also be conducted through a trading trust,
which is taxed at progressive rates on a basis similar to
that for taxation of natural persons, thereby possibly
offering a limited tax opportunity. There may be
statutory limitations in terms of the current Companies
Act if the number of trustees, or in some cases the
number of beneficiaries, exceeds 20 persons.
Choice of Acquisition FundingThe consideration of the tax treatment of interest and
dividends plays an important role in the choice between
debt and equity funding. A hybrid instrument, which
combines the characteristics of both debt and equity,
may also be used to finance the purchase
Debt
An important advantage of debt over equity is the
greater flexibility it provides. Debt can be introduced
from any company within a group, or from a financial
institution, or any other third party. In addition, debt can
be varied as a group's funding requirements change,
whereas any change in equity, particularly a decrease,
can be a complex procedure.
Also, as a method of remitting profits from the
subsidiary, using as much debt as is possible and
remitting income as interest is, in comparison to
dividends, currently more tax-efficient. This is because a
dividend attracts tax in the form of STC (or dividends
withholding tax in the future) and is not tax deductible in
the hands of the distributing company. On the other
hand, interest is typically tax deductible (subject to
meeting the requirements of the general deduction
formula).
For these reasons, there is an advantage in funding the
investment in South Africa with as much debt as
possible, rather than raising equity. But the subsidiary
should not be thinly capitalized and transfer pricing rules
concerning rates of interest charged between
connected parties should be complied with, as should
the Exchange Control requirements, discussed later in
the chapter.
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It should also be noted that the purpose of the loan
funding is crucial, if the interest is to be tax deductible in
the hands of the South African subsidiary. This is
because, typically, only interest paid on funding used to
acquire assets that produce income will be tax
deductible.
Moreover, to prevent foreigners or foreign-owned
companies from gearing their South African operations
with excessive local debt, restrictions are placed on the
local borrowings of such resident companies. The
regulations apply to affected persons. The effect of the
restrictions is that an affected person may only borrow
funds from local sources up to a maximum of a
percentage of its effective capital, calculated in
accordance with a stipulated formula. This in turn also
restricts the amount that a non-resident can borrow
locally to finance a foreign direct investment in South
Africa.
Deductibility of Interest
When funds are made available to the borrower in
South Africa, the interest earned by the lender, being
from a South African source, will, in most cases, be
subject to normal income tax. The tax that can be
imposed may be limited by a tax treaty. Interest
received by or accruing to a person who is not a
resident is, in most cases, exempt from tax in South
Africa.
Interest incurred on borrowed funds will usually be
allowed as a deduction, provided the funds are directed
towards earning income taxable in South Africa.
Interest on foreign loan funding can be remitted abroad,
provided the South African Reserve Bank (SARB) has
previously approved the loan facility, the repayment
terms, and the interest rate charged on the loan.
Approval from the SARB must be obtained by the South
African exchange control resident before any foreign
financial assistance may be accepted. This is to ensure
that the repayment and servicing of loans do not disruptthe balance of payments. For loans, this would entail
providing full details of the loan to be received, the
purpose of the loan, the repayment profile, details of all
finance charges, the denomination of the loan, and the
rate of interest to be charged. The loan itself does not
need to be approved by the SARB for the funds to flow
into South Africa, but, as already noted, the non-
approval of the loan may result in restrictions on the
repayment of the loan as well as any disinvestment
from South Africa.
The SARB will usually accept an interest rate that does
not exceed the prime lending rate in South Africa when
the loan is denominated in ZAR. Where the loan is
denominated in foreign currency, the SARB would
accept a rate that does not exceed the relevant inter-
bank rate. Accordingly, the SARBs requirements are
not entirely in line with the thin-capitalization provisions
as far as the determination of an interest rate is
concerned. KPMG in South Africa is of the view,
however, that should the circumstances be explained to
the SARB, a higher interest rate more in line with
acceptable transfer pricing rates may be acceptable to
the SARB.
Withholding Tax on Debt and Methods to
Reduce or Eliminate
Since 1 October 1995, dividends paid to non-residents
have not been subject to non-resident shareholders tax.
These dividends are, however, subject to STC. The new
dividends WHT will be introduced at a rate of 10
percent, which may be reduced by a tax treaty.
There is no WHT on interest payments to non-residents.
Checklist for Debt Funding
Thin-capitalization in respect of the debt to equityratio of the company.
Transfer pricing in respect of the interest ratescharged.
The possibility of higher rates applied to taxdeductions in other territories.
Equity
A purchaser may use equity to fund its acquisition,
possibly by issuing shares to the seller as consideration,
or by raising funds through a seller placing.
New share issues will not be subject to STT, but any
dividends paid by a South African company are not
deductible for South African tax purposes.
Foreign dividends (that is, sourced from outside South
Africa) are taxable, subject to certain exemptions. The
main exemption is when a resident owns 20 percent or
more of the equity share capital and voting rights of the
foreign company declaring the dividend. Certain exempt
dividends do not qualify as secondary tax on companies
(STC) credits, if they are subsequently declared by the
South African company.
Where the company is thinly capitalized, it would be
disadvantageous to increase borrowings without also
obtaining a fresh injection of equity so that the debt-to-
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equity ratio and interest cover are adequate for South
African tax purposes.
Non-tax grounds may also exist for preferring equity, for
example where a low debt-to-equity ratio is favored.
This factor is often the reason for companies choosing
hybrid funding.
Hybrids
There are no special rules relating to hybrid instruments,
other than the deemed interest on hybrid instruments
discussed above. The normal tax principles relating to
debt and equity apply. The provisions of the Banks Act,
which regulates the issue of commercial paper, and the
Companies Act, which regulates offers to the public,
may need to be considered. This will replace STC.
Discounted Securities
The tax treatment of securities issued at a discountnormally follows the accounting principles, with the
result that the issuer should be able to obtain a tax
deduction for the discount accruing over the life of the
security, if the discount amounts to interest for tax
purposes.
Deferred Settlement
The period or method of payment generally does not
influence the tax nature of the proceeds. The payment
for an asset of a capital nature can be deferred without
altering the capital nature of the proceeds. However,
where the full selling price is not clearly stipulated and
payment is based on a proportion of profits, an
inherently capital transaction may be treated as revenue
and taxed in the hands of the vendor. Likewise, care
should be taken not to have the sale proceeds
characterized as an annuity, which is specifically taxable
in South Africa.
Share Swaps
Approval from the exchange control authorities is
required for the exchange of shares in cross-border
mergers and amalgamations, or for issues of shares on
acquisition of assets. To obtain this approval, the assets
and shares must be valued.
When shares are issued are in exchange for an asset,
South African legislation deems the shares issued to be
equal in value to the market value of the asset acquired.
Moreover, the asset is deemed to have been acquired
by the company issuing the shares at the market value
of the asset on the date of acquisition.
Other Considerations
Concerns of the Seller
The concerns for a seller may vary depending on
whether the acquisition took place via shares or via a
purchase of assets. As discussed above, numerous
consequences arise on firstly whether the assets or theshares are purchased. When the assets are acquired by
the purchaser, for example, capital gains tax may be
levied on the capital gain realized on the disposal of the
assets. Furthermore, to the extent that any deductions
were claimed against the original cost of the assets and
the amount realized from the sale of the assets exceeds
the tax values thereof, the seller may experience claw-
backs, which it would have to include in its gross
income (as defined) and would, therefore, be subject to
income tax at the normal rate of 28 percent.
When the seller does not receive adequateconsideration of the disposal of its assets, the
transaction may be subject to donations tax at the rate
of 20 percent on the difference between the
consideration actually given and the market value
consideration.
To the extent that the assets are disposed of, the losses
of the seller cannot be carried forward into the new
company and would therefore be ring-fenced in the
seller, and thus lost.
When the seller decides to dispose of shares, the tax
losses in the company will remain in the company,
available for future set-off. However, when the South
African Revenue Service is satisfied that the sale was
entered into for the purpose of using the assessed loss
and that, as a result of the sale, income has been
introduced into the company to use the loss, the set-off
of the loss may be disallowed.
The sale of shares may also be subject to capital gains
tax, assuming the shares were held by the seller on
capital account. To the extent that the seller disposed of
the shares in a profit-making scheme, the proceeds of
the sale of the shares may be taxed on revenue
account, which is a higher rate than the rate of capital
gains tax. The provisions of the three-year holding rule
in the South African Income Tax Act would, however,
deem the proceeds received on the sale of shares held
for a continuous period of three years to be capital in
nature, and hence, taxed at the capital gains tax rate of
14 percent (that is, half the corporate income tax rate of
28 percent).
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Company Law and Accounting
In South Africa the operations of a company are
generally acquired by purchasing the business from the
company as a going concern, by merger, or by takeover.
In addition, the current Companies Act recognizes the
following means by which mergers and takeovers of
corporate entities can be effected:
Sale of a greater part of a companys assets(section 228)
Scheme of arrangement
Reduction of capital by way of a share buy-back
Redemption of preference shares
The new Companies Act contains a chapter that
specifically sets out the procedure for fundamental
transactions (section 115). The following transactions
are categorized as fundamental transactions for the
purposes of the new Companies Act:
A disposal of all or the greater part of the assets orundertaking of the company (section 112)
An amalgamation or merger (section 113)
A scheme of arrangement between a company andits shareholders (section 114)
A special resolution is required to authorize a
fundamental transaction. In addition, notwithstanding
the approval by special resolution, the company may not
implement the approval by special resolution without
the approval of a court if:
the resolution was opposed by at least 15 percentof the voting rights exercised on that resolution and
any shareholder who voted against the resolution
requires the company to seek court approval; or
any shareholder who has opposed the resolutionhas been given consent by a court to have the
transaction reviewed by the court.
If an 85-percent majority or less is obtained, the
company will need first to obtain court approval. If more
than 85-percent majority is obtained, the company may
proceed to implement the transaction, unless a
shareholder who opposed the transaction is successful
in applying to the court to require the company first to
obtain court approval to implement the transaction. The
court is only required to review the resolution (and not
the terms of the overall transaction) and may only set
aside the resolution if the resolution is manifestly unfair
to any class of shareholder, or if the vote was materially
tainted by conflict of interest, inadequate disclosure,
failure to comply with the new Companies Act or the
memorandum of incorporation (MOI), or there was any
other significant and material procedural irregularity.
The Securities Regulation Code on Takeovers and
Mergers (the Code) recognizes a further means ofeffecting a takeover, namely a takeover offer.
The choice will normally be influenced by negotiation
between the offering company and the target company,
which will take into account tax, security transfer tax,
and exchange control considerations, as well as the
requisite majority approval that may be required from
shareholders to approve the transaction.
Takeover Offer
The Code regulates takeover offers in respect of
affected transactions (as defined in section 440A of the
current Companies Act and discussed in more detail
below) to protect the interests of the shareholders of
the target company, and particularly those of minority
shareholders, in relation to the consideration offered for
their shares. A takeover offer is an offer to all
shareholders of the target company or to all holders of
shares of a particular class, for their shares, which, if
implemented, will either:
vest control of the target company directly orindirectly in the offering company; or
result in the offering company acquiring all theshares or all the shares of a particular class.
The procedures to be followed are laid down in the
Code and the provisions of the current Companies Act,
and require full particulars of the offering company and
the offer to be set out in a statement that must be
attached to the offer. The provisions of the Code only
apply to certain companies. They are discussed in
greater detail later in the chapter.
Where a takeover offer is accepted by holders of not
less than 90 percent of the shares (none of whom were
nominees for the offering company), the current
Companies Act (section 440(k)) provides for a procedure
that enables the shares of holders who have not
accepted the offer to be acquired compulsorily.
Takeover Offer in Terms of the New Companies Act
The new Companies Act sets out provisions relating to
takeovers and offers. Takeovers will be overseen by the
Takeover Regulation Panel (TRP) (similar to the current
Securities Regulation Panel (SRP)) and monitored in
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accordance with takeover regulations (which are
expected to be similar to the current SRP Code).
The TRP and takeover regulations will apply to a
regulated company. The definition of regulated company
is wider than companies that are currently governed by
the SRP Code. A regulated company includes a publiccompany, a state-owned company and a private
company if the memorandum of incorporation (MOI) of
the private company provides for its application or if 10
percent or more of the shares of such private company
have been transferred within the previous 24 months
(this percentage may vary, but cannot be less than 10
percent). The takeover regulations could apply to private
companies irrespective of their size, because the test is
dependent not on the number of shareholders or the
size of shareholder equity, but rather on the percentage
of shares transferred over a period.
A number of the provisions relating to the required
disclosure of share transactions, mandatory offers,
comparable and partial offers, restrictions on frustrating
action, and prohibited dealings before and during an
offer, which are currently in the SRP Code, are now
included in the new Companies Act.
The new Companies Act has provisions similar to
section 440(k) of the current Companies Act allowing a
compulsory squeeze out of minority shareholders where
90 percent or more of the shareholders have accepted
an offer to acquire the shares.
Scheme of Arrangement
A scheme of arrangement is a South African legal term
referring to a company restructuring that has been
sanctioned by the High Court of South Africa and which
is discussed in more detail later in the chapter. There
are specific rules in the current Companies Act
applicable to the term, which has nothing to do with a
tax scheme.
The current Companies Act provides for a compromise
or arrangement to be made between a company and all
or any class of its creditors, a company and all or any
class of its members, or a company and any
combination of its creditors and members. The
compromise or arrangement must be agreed to by
either a majority in number representing 75 percent in
value of the creditors (or class of creditors) of the
company, or a majority representing 75 percent of the
votes exercisable by the members or class of members.
The compromise or arrangement has no effect until
sanctioned by the High Court.
A takeover is effected in the form of a reorganization of
the issued capital of the target company. The scheme
typically provides for the cancellation or acquisition of
shares not already held by the offering company and for
the offering company to pay the agreed consideration to
the disposing shareholders.
Where a takeover is effected by a scheme of
arrangement, often shares in the company used to
effect the takeover are issued in exchange for shares in
the acquiring company. Again, the High Court must
approve the arrangement.
Scheme of Arrangement under the New Companies Act
A scheme of arrangement falls within the ambit of
fundamental transactions and must be carried out in
accordance with the procedure prescribed.
The provisions in the new Companies Act allowing for
schemes of arrangement allow greater flexibility in the
manner in which schemes of arrangement can be
effected between a company and its shareholders. To
effect a scheme of arrangement, the company would
need to comply with the requirements for approval of a
fundamental transaction and thus would not
automatically require an application to the court, as is
required by section 311 of the current Companies Act.
An independent expert must be appointed to prepare a
report, which must be submitted to all shareholders for
consideration before they vote on the scheme of
arrangement. A company cannot enter into a scheme of
arrangement if it is in liquidation or a business rescue
process.
Appraisal Rights
The new Companies Act has introduced a new concept
called appraisal rights for shareholders. The appraisal
rights apply where the company has:
amended its MOI to change the rights attaching toany class of shares in a manner materially adverse
to the rights of a particular shareholder; or
entered into a fundamental transaction.
The appraisal rights do not apply in the above
circumstances if the transaction is pursuant to a
business rescue plan that has been approved by the
shareholders. If a shareholder (the dissenting
shareholder) has given notice to the company that it
intends opposing any resolution for a matter referred to
above, and thereafter votes against the particular
resolution, the dissenting shareholder can require the
company to repurchase the dissenting shareholders
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shares at fair value. This right is afforded to the
dissenting shareholder irrespective of the majority
percentage approval obtained by the company. The new
Companies Act sets out certain formal requirements
that the dissenting shareholder needs to follow in order
to enforce its appraisal rights.
Reduction of Capital by Way of a Share Buy-Back
A company may, in certain circumstances, acquire its
own shares. A company may, by special resolution, give
a general or special approval for the acquisition of its
shares if authorized by its articles. A general approval is
valid until the next annual general meeting. A share buy-
back mechanism may also be used to effect a takeover
whereby all the shares held by the shareholders, other
than the prospective new controlling shareholder, are
acquired by the company. Upon acquisition by the
company, such shares are cancelled.
No payment for the acquisition of shares may be made
by the company if there are reasonable grounds for
believing that the company is or would, after the
payment, be unable to pay its debts in the ordinary
course of business, or if the consolidated assets of the
company (at fair market value) would, after the
payment, be less than the consolidated liabilities.
When the company acquires shares at a premium, the
premium may be paid out of reserves. Although the
current Companies Act does not prescribe a limit on the
percentage of shares that may be acquired by the
company, the company is prohibited from acquiring its
entire ordinary share capital. Furthermore, in terms of
the listings requirements of the Johannesburg
Securities Exchange SA (the JSE), any general
repurchase may not exceed 20 percent of a listed
companys issued share capital in any financial year.
Reduction of Capital by Way of a Share Buy-Back in
Terms of the New Companies Act
A company may repurchase its own shares (a share
buy-back) provided that the company meets thesolvency and liquidity test. A share buy-back may be
authorized by the board without the need for
shareholder approval. This differs from the current
Companies Act which requires a special resolution for a
share buy-back.
Redemption of Redeemable Preference Shares
Use of this avenue is limited to situations where a
holding company wishes to acquire the minority interest
in a partially-owned subsidiary. It is first necessary to
convert the shares held by the minority into redeemable
preference shares (with or without provision for a
premium) by special resolution. The redeemable
preference shares are then redeemed and the
redemption proceeds payable to the shareholders will
need to be funded out of profits available for distribution
or out of the original premium (if any) that arose on the
original issue of such shares. This form of change in
control does not require the participation of the court or
the consent of creditors.
The current Companies Act contains a specific provision
dealing with the redemption of redeemable preference
shares whereas the new Companies Act contains no
such provision.
Financial Assistance to Purchase Own Shares
Section 38 of the current Companies Act prohibits a
company from making loans for the acquisition of its
shares, except in certain limited circumstances. Section
38 does, however, contain a general exemption (section
38(2A) that allows a company to provide assistance for
the purchase of, or subscription for, shares of that
company if the company's board is satisfied that:
after the transaction, the consolidated assets of thecompany, fairly valued, will be more than its
consolidated liabilities;
after providing the assistance, and for the durationof the transaction, the company will be able to pay
its debts as they become due in the ordinary course
of business; and
the terms on which the assistance is to be givenare sanctioned by a special resolution of members.
Financial Assistance to Purchase Own Shares in Terms
of the New Companies Act
The new Companies Act includes restrictions on a
company providing financial assistance for the
subscription or purchase of its own shares, or shares in
a related or inter-related company. This restriction is
wider than section 38 of the current Companies Act,
which only applies to financial assistance by a company
for its own shares or shares in its holding company. The
new Companies Act will effectively apply to financial
assistance for buying shares of the company or any
other company within the group of companies of which
the company is a part.
The directors may authorize the provision of financial
assistance if immediately after the provision of the
financial assistance the company meets the solvency
and liquidity test, and the financial assistance has been
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approved by a special resolution passed within the
previous two years.
In addition, the directors must be satisfied that the
financial assistance is fair and reasonable to the
company. A special resolution will not be required if the
financial assistance has been given in connection withan employee share scheme (provided it meets the
requirements of the new Companies Act).
Group Relief/Consolidation
South Africas tax law does not recognize the concept
of group relief, where losses made by some group
companies are offset against profits made by other
group companies. Companies are accordingly assessed
as separate entities. However, intra-group transactions
may take place in a tax-neutral manner in certain
circumstances, mostly relating to situations in which
companies form part of the same group of companies,
by virtue of the minimum shareholding requirement of
70 percent of the equity share capital of the companies.
Transfer Pricing
The overriding principle of the transfer pricing legislation
is that cross-border transactions between connected
persons should be conducted at arms length.
Subsection 31(2) of the Act effectively provides that
where a cross-border agreement has been concluded
between connected persons for the supply of goods or
services (such as the granting or assignment of any
right such as a royalty agreement, the provision of
technical, financial or administrative services, the
granting of financial assistance such as a loan, etc.), and
such goods and services are not supplied on an arms
length basis, the Commissioner may, in determining the
taxable income of any of the persons involved, adjust
the price in order to reflect an arms length price. An
adjustment by the Commissioner may furthermore
result in a liability for STC for the South African tax-
resident company.
Dual Residency
There are few advantages in dual-residency. The losses
of a dual resident investing company cannot be offset
against profits of other South African companies.
Foreign Investments of a Local Target
Company
South Africas controlled foreign companies (CFC)
legislation is designed to prevent South African
companies from accumulating profits offshore in low-tax
countries.
When a South African resident directly or indirectly
holds shares or voting rights in a foreign company, the
net income of that company will be attributed to the
South African resident if that foreign company is a CFC
and does not qualify for any of the available exclusions.
The net income of a CFC attributable to the South
African resident is the taxable income of the CFC,
calculated as if that CFC were a South African taxpayer
and a resident for specific sections of the Act.
Consequently, both income and capital gains are
attributed. The main exemption to attributing a CFCs
income is the Foreign Business Establishment (FBE)
exemption. If a CFCs income and gains are attributable
to an FBE (including gains from the disposal or deemed
disposal of any assets forming part of that FBE), they
will generally not be attributed to the South African
resident parent.
Other Regulatory Authorities
Securities Regulation Code on Takeovers and Mergers
(the Code)
The Code, which is largely based on the City Code
issued by the London Panel on Takeovers and Mergers,
makes provision for the Securities Regulation Panel
(established by the current Companies Act) to resolve
uncertainties and disagreements. The underlying
principle of the Code is to ensure fair and equal
treatment of all holders of relevant securities during
affected transactions. The Code also provides for anorderly and structured framework within which affected
transactions are to be conducted.
Section 440 of the current Companies Act prohibits any
person from entering into an affected transaction except
in accordance with the Code, unless the panel
otherwise exempts the person. The panel also has a
general discretion to authorize, subject to such terms
and conditions as it may prescribe, non-compliance with
or departure from any requirement of the Code, and to
excuse or exonerate any party from failure to comply
with any such requirement.
Affected transactions are those that, when taking into
account any securities held before such transaction:
Vest control of any company (excluding a closecorporation) in a person (or persons acting in
concert) in whom control did not vest prior to the
transaction.
Involve the acquisition by any person (or personsacting in concert) in whom control of any company
(excluding a close corporation) vests on or after the
date of commencement of the Companies Second
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Amendment Act 1990 (section 1C) of further
securities of that company in excess of the limits
prescribed in the Rules.
Are disposals as contemplated in section 228 of thecurrent Companies Act. Section 228 of the current
Companies Act requires a special resolution for thedisposal of the whole or greater part of the
undertaking or assets of a company. This section
will not apply to a disposal between a wholly-
owned subsidiary and its holding company or
between two wholly-owned subsidiaries. An
undertaking or assets of a company, and the part to
be disposed of, shall be calculated for the purposes
of section 228, according to the fair value of the
undertaking or assets as described in financial
reporting standards.
For the purposes of the Code, control means, broadlyspeaking, a holding of securities entitling the holder to
exercise 35 percent or more of the voting rights in
general meeting, notwithstanding that such entitlement
does not involve the de facto control of the company. A
person (or persons) who hold(s) not less than 35
percent but not more than 50 percent of the voting
rights in a company is prohibited from acquiring, in any
one year, securities that carry more than 5 percent of
the voting rights in such company without making a
similar offer to other shareholders.
Companies covered by the Code include:
all public companies, whether listed or not;
statutory corporations that are resident or deemedto be resident in the Republic of South Africa; and
private companies in which the shareholdersinterest (valued at the offer price) and loan capital
exceeds ZAR 5 million and that have more than 10
shareholders.
Very briefly, the general principles of the Code include:
all holders of the same class of securities of thetarget company are treated similarly by the offering
company;
the offering company and the target furnish thesame information to all holders of securities, unless
the Securities Regulation Panel agrees otherwise;
the offer is made only after the offering companyand its financial adviser have carefully considered
whether the offering company will be able to
implement the offer;
holders of relevant securities are provided with allthe relevant and sufficient information and advice
necessary to reach an informed decision;
documents or advertisements addressed to holdersof securities are prepared with great care and
accuracy by the offering company, the target, ortheir advisers;
all parties take reasonable steps to prevent thecreation of a false market in the securities of the
offering company or the target;
oppression of a minority is unacceptable;
the board of the target company refrains fromtaking any action likely to result in the offer being
frustrated or the holders of the relevant securities
being denied an opportunity to decide on its merits
without the approval of the holders of those
securities in general meeting;
directors of the offering company and target at alltimes act only in their capacity as directors and
without regard to personal or family shareholdings;
an offering company contemplating an acquisitionthat may give rise to an obligation to make a
general offer, in an affected transaction, to all other
holders of the relevant securities, ensures that it
can, and will continue to be able to implement such
an offer; and
an underlying principle that the existing holder ofshares or securities in the target (whether or not
carrying a vote) shall be entitled to dispose of that
interest on terms comparable to the parties to an
affected transaction.
The Code regulates takeovers and mergers in South
Africa and affords protection to minority shareholders. It
attempts to maintain secrecy to prevent insider trading
and ensures an even-handed approach by the parties
involved in the negotiating process.
Please see the discussion in respect of takeovers under
the heading Company Law Considerations.
JSE Securities Exchange SA Listing Requirements
The JSE listing requirements apply to all companies
listed on the JSE and to applicants for l istings, and were
first introduced in July 1995. Several amendments have
been made to the listings requirements since. The
requirements are aimed at raising the levels of certain
market practices to international standards as well as
taking into account situations unique to the South
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2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
African economy and culture. It is an integral function of
the JSE to provide facilities for the listing of the
securities of companies (domestic or foreign) and to
provide users with an orderly marketplace for trading in
such securities and to regulate accordingly.
The listing requirements reflect, inter alia, the rules andprocedures governing new applications, proposed
marketing of securities, and the continuing obligations
of issuers, and are aimed at ensuring that the business
of the JSE is carried on with due regard to the public
interest.
With respect to mergers and acquisitions, the JSE
listing requirements regulate transactions of listed
companies by a set rules and regulations to ensure full,
equal, and timely public disclosure to all holders of
securities and to afford them adequate opportunity to
consider in advance, and vote on, substantial changes inthe companys business operations and matters
affecting shareholders rights.
The JSE listing requirements are numerous and may be
onerous and, to comply with the various requirements,
the listed company considering a transaction with
another party will need to assess each transaction on
the basis of its size, relative to that of the listed
company, to determine the full extent of these
requirements and the degree of compliance and
disclosure needed.
Competition Commission
The Competition Commission must be pre-notified of
any merger in circumstances where certain prescribed
thresholds are attained. In terms of the South African
Competition Act, a merger occurs when one or more
companies directly or indirectly acquire(s) or
establish(es) direct or indirect control over the whole or
part of the business of another company.
The threshold test that has to be satisfied before a
merger will be regarded as notifiable is that the higher
of the annual turnover or gross assets of the target
business must be equal to or exceed ZAR 80 million and
the combined annual turnover or gross assets of the
target business, the acquiring company, and other group
companies of the acquiring company must be equal to
or exceed ZAR 560 million.
Only turnover in, into, or from South Africa and only
gross assets in South Africa or arising from activities in
South Africa must be taken into account. If these
thresholds are met, the transaction would constitute an
intermediate merger. In this case, the Competition
Commission must be notified and the approval of the
Competition Commission must be obtained prior to the
implementation of the transaction.
If, however, the higher of the annual turnover or gross
assets of the target business equals or exceeds ZAR
190 million and the combined annual turnover or gross
assets of the target business, the acquiring company,and other group companies of the acquiring company
equals or exceeds ZAR 6.6 billion, the transaction will
constitute a large merger. Again in this case, the
commission must be notified, but here the approval of
the Competition Tribunal must be obtained prior to the
implementation of the transaction.
The primary factor for consideration by the Competition
Commission and/or the Competition Tribunal (as the
case may be) is whether it is likely that the merger will
result in the substantial prevention or lessening of
competition. Ultimately, the Competition Authoritiesmust be satisfied that the companies in the market will
behave competitively and that certain prescribed public
interest factors will not be negatively affected. Factors
considered by the Competition Authorities in assessing
the transaction include, inter alia, the strength of
competition in the relevant market, barriers to entry into
the market, and the level of import competition.
Exchange Controls
No cross-border merger or acquisition should be
contemplated without due consideration being given to
the likely impact of the strictly enforced South African
Exchange Control Regulations.
The exchange control authorities allow investment
abroad by South African companies, although a strong
case would have to be made proving, inter alia, the
benefits to the South African balance of payments, the
strategic importance of the proposed investment, and
the potential for increased employment and export
opportunities. A minimum 25-percent shareholding is
generally required.
Remittance of Income
Income derived from investments in South Africa is
generally transferable to foreign investors, subject to
the following restrictions:
Interest is freely remittable abroad, provided theauthorities have approved the loan facility and the
interest rate is related to the currency of the loan,
such as U.S. dollars, at the London Interbank
Offered Rate (LIBOR).
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2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International
Cooperative (KPMG International), a Swiss entity. All rights reserved.
Payment of management fees by a South Africancompany to an overseas company or beneficiary is
subject to exchange control approval. The amount
paid must be reasonable in relation to the services
provided. Payments of such fees by wholly-owned
subsidiaries of overseas companies are not readily
approved. Authorized dealers may approve, against
the production of documentary evidence confirming
the amount involved, applications by South African
residents to effect payments for services rendered
by non-residents, provided that the fees payable are
not calculated on the basis of a percentage of
turnover, income, sales, or purchases.
Agreements for the payment of royalties andsimilar payments for the use of technical know-
how, patents, and copyrights require the prior
approval of the exchange control authorities.
All license agreements relating to the use oftechnology in manufacture are first vetted by the
Department of Trade and Industry. Other license
agreements are submitted directly to the exchange
control authorities.
Dividends must be supported by a directorsrepresentation letter, annual financial statements, a
copy of the board resolution declaring the dividend,
a completed Exchange Control form MP79(a)
relating to local borrowings, and a covering letter
from the auditors.
Local Borrowing Restrictions
To prevent overseas-owned companies from
introducing excessive debt to their South African
operations, restrictions are placed on local borrowings.
The regulations apply to companies that are more than
75 percent foreign held and restrict financial assistance
to a maximum percentage of total effective capital in
accordance with the following formula:
300 percent + South African participation/non-resident participation x 100 percent
A 100-percent foreign-held company may thus receive
local financial assistance of up to 300 percent of its
effective capital.
Effective capital is defined to include issued share
capital and premium, retained income (or losses), other
earned reserves created out of profits, deferred tax,
outstanding dividends, the permanent portion of an
inter-company trading account with an overseas
associate or holding company, and approved
shareholders loans that are in proportion to ownership.
Financial assistance includes the lending of currency,
granting of credit, taking up of securities, concluding of
hire-purchase or lease agreements, financing of sales or
stocks, discounting of receivables, factoring of debtors,guaranteeing of acceptance credits, guaranteeing or
acceptance of any obligation, any suretyship (that is, a
contract whereby a person obliges himself/herself on
behalf of a debtor to a creditor, for the payment of the
whole, or part of what is due from such debtor, and by
way of accession to his obligation) and any buyback or
leaseback agreement.
Structuring the TransactionThe South African Income Tax Act contains special rules
relating to asset-for-share transactions, amalgamation
transactions, intra-group transactions, unbundling
transactions, and liquidation distributions. The purpose
of these provisions is to facilitate mergers, acquisitions,
and restructurings in a tax-neutral manner. The rules are
very specific and generally do not apply cross-border, or
when one of the entities in the transaction is a trust.
Mergers and Amalgamations
A merger or an amalgamation is a transaction in which
the assets of two or more companies become vested in
or come under the control of one company, the
shareholders of which then consist of the shareholders
(or most of the shareholders) of the companies that
were merged. The single company that owns or
controls the combined assets of the merged companies
may be either:
one of the companies that was merged and whoseshare capital was re-organized to enable it to be the
vehicle of the merger; or
a new company formed for the purpose of themerger.
Although the current Companies Act does notspecifically contemplate the concept of mergers and
amalgamations, the new Companies Act has introd