Both the Income Tax Act (“ITA”) and the Companies Act (“CA”) provide for the amalgamation (or merger) of two entities. From a tax perspective, an amalgamation involves the process whereby one company transfers all its assets and liabilities (known as the “Amalgamating Company”) to another company (known as the “Resultant Company”) in exchange for which the Resultant Company will issue the Amalgamating Company with equity shares. Following the transfer of the assets and liabilities and the issue of shares, the Amalgamating Company is either deregistered or liquidated.
Typically, such a transfer of assets will involve the disposal thereof and which would trigger certain tax consequences. That notwithstanding, if the amalgamation is performed in accordance with section 44 of the ITA, specific rollover relief provisions will apply.
Relief against tax on disposal
In terms of section 44, the Amalgamated Company is deemed to have disposed of the asset for an amount equal to the base cost of the asset and the Resultant Company, therefore, acquires the asset for that amount. This effectively results in no capital gains tax (“CGT”) or income tax being payable on the transfer of the assets through the section 44 mechanism.
Clawback provisions and further considerations
Notwithstanding the relief provided by section 44, there are certain clawback provisions that inhibit the ability of the Resultant Company to subsequently dispose of the assets. The effect of these clawbacks will differ depending on whether the assets are capital assets or trading stock. These clawbacks typically are only relevant for 18 months following the amalgamation.
Loans between the transacting parties could also potentially lead to obstacles in the implementation of a transaction. This can be either because the loan may be prohibited from being carried over in terms of the amalgamation or because extinguishing the loan in that manner may trigger the debt waiver provisions, which would lead to unintended tax consequences.
It is further a requirement in terms of the ITA that the Amalgamated Company either be deregistered or liquidated within 36 months of the amalgamation taking place.
Company law considerations
Outside of the pure tax considerations and ensuring compliance with section 44 of the ITA, there are also various provisions that regulated the amalgamation from a company law perspective. Specifically, sections 113 and 116 of the CPA deals with the requirements that need to be met from a company law perspective. Outside of this specific section in the CPA, there are numerous other provisions that must also be given attention. Amongst others the following provisions are important (to the extent required):
- The declaration of personal financial interest by directors;
- Compliance with the competition commission; and
- The takeover panel regulations.
Conclusion
Amalgamations are typically intricate transactions to execute in compliance with the various regulations, however, if properly executed can afford the significant tax and commercial benefits for entities at large. That notwithstanding it is advisable that companies obtain the necessary professional assistance when executing transactions of this nature.