Directors and Business owners – don’t get bitten - Company law v Tax law: Sale of shares, business or assets

THE new Companies Act aims to align South Africa with international best practice in the area of company law, helping to strengthen the country's position as a destination in which to conduct business.

The new Companies Act, Act 71 of 2008 replaced the Companies Act 1973 on 1 May 2011. Directors and business owners seeking to sell or purchase shares, a business or assets must now ensure that the transaction complies with both the Companies Act and the Income Tax Act provisions relating to restructuring. Compliance with the Income Tax Act restructuring provisions is necessary in order to obtain maximum tax benefit relating to the transaction.

BDO tax director Dawid van der Berg said the new Companies Act reflects a significant amount of global influence, specifically input from US and Canadian company law. One major impact is that businesses have to ensure that they involve properly skilled corporate lawyers and tax specialists early in the planning stages of any transaction so that all agreements are drafted in such a way as to maximize potential tax relief and minimize unforeseen adverse tax consequences.

"Even though the transaction must comply with company law principles before the tax implications can be determined, it is important to consider the potential tax consequences of the transaction at the planning stage.

In this sense, care must be taken that a company law mechanism that appears to be adequate to effect a transaction does not ultimately limit or preclude potential income tax relief the transaction may have qualified for had another mechanism been selected to achieve the same result - the company law and tax principles must be in alignment and that means the early involvement of both sets of advisors." van der Berg said.

“Getting these transactions wrong often has devastating tax consequences for the business concerned. Company law and tax law have become more and more complex. Tax is often one of the largest expenses a business has and it needs to be given the attention it deserves," van der Berg concluded.

BDO tax director David Warneke warns of anomalies between the Companies and Income Tax Acts which must be taken into consideration prior to entering into a corporate restructuring transaction. “One such anomaly is that the corporate restructuring provisions of the Income Tax Act envisage the assumption by an acquiring company of certain debt of the transferring company as part of a corporate restructuring transaction. The understanding of the term ‘debt’ from a tax point of view differs from the concept of ‘liabilities’ as referred to in the Companies Act as ‘debt’ would not include contingent liabilities. The result is that many corporate restructurings carried out in terms of the income tax restructuring rules will not in fact be entirely tax neutral.”