BPR 374: Determination of group of companies
SARS has published Binding Private Ruling (“BPR”) 374 which determined the manner in which the definition of group of companies should be applied.
This is a ruling on the interpretation and application of section 1(1) of the Income Tax Act 58 of 1962 (“IT Act”) – definition of “group of companies”.
Simplistically speaking, a group of companies means two or more companies in which one company, directly or indirectly, holds shares in at least one other company comprising at least 70% of the equity shares.
Parties to the proposed transaction:
The applicant is a resident company.
Co-applicant 1 is a resident company.
Co-applicant 2 is a resident company and a wholly-owned subsidiary of the Co-applicant 1.
Company A is a resident company.
Proposed transaction:
It is proposed that co-applicant 2 will acquire assets (i.e. a number of companies) from company A. In exchange, co-applicant 2 will issue ordinary shares and preference shares to company A in a number of tranches.
The initial issue shares and deferred issue shares (collectively, the issue shares) to be issued to company A may not exceed an agreed maximum percentage which percentage is less than 20% (maximum shareholding) of co-applicant 2’s total issued shares on the deferred date.
The terms attaching to the preference shares essentially provide for the automatic conversion of all the preference shares by the fifth anniversary of the issue date (final conversion date).
Depending on the number of issue shares (ordinary and preference shares) issued by co-applicant 2 to company A, and preference shares converted by the final conversion date, company A may hold the maximum shareholding at the end of the day on the final conversion date. Company A may not hold more than the maximum shareholding in co-applicant 2 at any given time from the effective date to the final conversion date.
Company A’s shareholding in co-applicant 2 will therefore never exceed 20%.
Ruling:
The applicant, co-applicant 1 and co-applicant 2 will continue to form part of a group of companies as at the effective date and at the final conversion date.
Find a copy of BPR 374 here.
30/05/2022
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