Corporates ‘can’ acknowledge that winding up a dormant company within their South African group of companies can result in a tax headache.
This is the case especially where the old irrecoverable debt owing by the dormant company was used for revenue or operating expenditure with the related debt waiver giving rise to a tax liability as a result of debt recoupments within the dormant company. The South African Revenue Service also encounters difficulty in collecting the related tax as the dormant company is technically insolvent, i.e. it does not have assets.
Given the adverse income tax implications arising for companies that used their borrowed funds for revenue or operating expenditure, the South African Institute of Chartered Accountants (SAICA) has, for some time now, been proposing the alignment of debt reduction provisions for group companies.
The 2017 Draft Taxation Laws Amendment Bill (the 2017 DTLAB) released for comment by the National Treasury and South African Revenue Services brings clarity and uniformity to the income tax and capital gains tax (CGT) rules when it comes to the tax provisions related to loan waivers or debt reduction for dormant companies within the same group of South African companies.
In terms of the 2017 DTLAB, the tax relief will now not only include an exemption for CGT, but also proposes a similar exemption for income tax.
In terms of the proposal, the exemption will apply in respect of a dormant group company which will be regarded as dormant if the following requirements are met during the financial year that the debt is waived, as well as the preceding three years (i.e. prior to the debt waiver):
- the company has not traded;
- no amounts have been received/accrued to the company;
- no assets have been transferred to or from the company; and
- no liability must have been incurred/assumed by the company.
The company must also have been part of the same group of companies for the same period, i.e. the year of the related debt waiver and the three preceding years. If legislated, this amendment will be effective from 1 January 2018.
The 2017 DTLAB may therefore be just what the Doctor ordered, even though the prescription is in very limited circumstances.
The fine print should also be read, being that the relief will not apply, inter alia, in respect of debt that arose in respect of assets that were subsequently disposed of under the corporate tax rules or debt that arose as a means of refinancing or renewing debt of any other company within the same group or related controlled foreign company.
Comments on the draft legislation are due by 18 August 2017, and one of these comments may include a proposal to align the debt reduction provisions in those instances where companies are placed in liquidation or deregistration and borrowed funds were used to fund revenue or operating expenditure.
If you wish to submit any comments on this matter to SAICA please do so via the email at email@example.com |