CORPORATE REORGANISATIONS National Treasury

List of Corporate Reorganisations 1.Corporate formations 2.Share-for-share acquisitions 3.Amalgamations (new) 4.Intra-group transfers 5.Unbundlings 6.Liquidations

Overall Policy Remains the Same 1.Tax-free corporate reorganisations act as a standard measure to reduce the potential cascading effect of CGT on multi-tier groups. 2.Tax-free corporate reorganisations are consistent with international practice, thereby keeping the South African tax system internationally competitive. 3.Tax-free corporate reorganisations promote onshore restructurings. 4.Tax should not apply if taxpayers simply convert their hard assets into indirect share interests; tax should apply only when there is a cashing-out.

Basic Requirements Remain the Same 1.Only equity shares can be received tax-free. 2.The 75/35/25+ ownership tests remain the same. 3.The 18 month anti-avoidance period remains the same. 4.This form of relief remains exclusively for domestic reorganisations: No relief exists for moving assets offshore. Some extended relief is being considered to promote tax-free repatriations (but the interaction with section 9E taxation on foreign dividends must be considered).

Current Anti-financial Instrument Holding Company Rules 1.As under current law, taxpayers cannot use corporate reorganisations for the tax-free shift of-- 1.financial instruments; or 2.companies with more than 50 per cent financial instruments (i.e., financial instrument holding companies) 2.Tax-free reorganisations should apply only to active businesses. 3.However, trade creditors (i.e., receivables) will now qualify as financial instruments because they are the core of any business. 4.Banks, insurance companies and other financial institutions may also now participate in company reorganisations-- –These companies are viable active businesses –The banking review revealed that company reorganisations are not the cause of the low effective rate (the low effective rate stems from preferred share schemes, leasing schemes, and derivative schemes).

Mix of Assets (1) 1.The biggest shortcoming of the prior regime was the failure to account for the total mix of assets in the tax- system. 2.There are five types of assets: trading stock, allowance assets, and capital assets with 3 sets of effective date rules (fair value method, time-appointment, and 20 per cent proceeds). 3.Allowance assets not only include depreciable assets but other assets that can generate deductions without sale (such as debt with partial write-offs, options).

Mix of Assets (2) 1.The new rules reflect the full mix of assets. 2.The new rules allow for multiple combinations: capital to trading stock, capital to allowance asset, etc… 3.The new rules cater the full range of tax attributes for assets transferred: Tax cost Time acquired Effective date rules Timing of depreciation (and other allowance deductions) Recoupment rules

Company Formations Nature of the Transaction NEWCO INDIVIDUALCOMPANY X R30 Ordinary shares Machinery R30 Value R10 base cost R70 Ordinary shares Office building R70 value base cost 12

Corporate Formations: Major Changes 1.The new regime is fully elective. 2.The new regime eliminates the anti-avoidance rules for convertible instruments. 3.The complex rules designed to prevent the splitting of realised losses and deferred gains were removed. 4.However, foreign companies with South African branches can no longer transfer assessed losses (or assessed capital losses) into a newly formed South African company.

Share-for-Share Combinations Nature of the Transaction TARGET ACQUIRING All target shares Newly issued acquiring shares

Share-for-Share Combinations: Major Changes 1.The regime could not be made elective because of the multiplicity of taxpayers involved. 2.The new regime eliminates the anti-avoidance rules for convertible instruments 3.The complex rules designed to prevent the splitting of realised losses and deferred gains were removed. 4.The tender offer procedure was clarified and extended. 5.Foreign companies can now be acquired tax-free. 6.However, a new 18-month rule was added requiring the acquiring company to retain control of the target company for an 18-month period.

Amalgamations Nature of Transaction TARGET (Liquidates) ACQUIRING Target assets New acquiring shares

Amalgamations: Major Considerations 1.The rules follow the share-for share regime at the shareholder level, allowing all shareholders of the target company to exchange their shares tax-free for acquiring shares. 2.The rules follow the liquidations rules at the company level, allowing the target company to liquidate tax-free into the acquiring company. 3.The regime allows for the amalgamation of unit trusts. 4.The regime could not be made elective because of the multiplicity of taxpayers involved. 5.The target company must liquidate within 6 months (or in the time period normally allowed for any liquidation).

Amalgamation: Major Issues Outstanding 1.Whether a foreign target company can be merged into a South African acquiring company. 2.The STC implications of the target company’s liquidation.

Intra-Group Transfers Nature of the Transaction Parent Sub 1 (selling) Sub 2 (buying) Factory 100 value 20 base cost Sub note

Intra-Group Transfers Nature of the Transaction Parent Sub 4Sub 3 Sub 2Sub 1 1.Under old law, Parent, Sub1, and Sub 2 constituted a single group. Sub 1/Sub 3 and Sub 2/Sub 4 constituted two additional groups. 2.Under new law, all the above companies qualify as one group. 3.All anti-avoidance rules against convertible instruments were dropped. 75%

Intra-Group Transfers: Major Changes 1.The current regime was partially elective/partially mandatory. The new regime is wholly elective. 2.Intragroup transfers are no longer exempt from STC per se. These transfers must follow the normal elective procedure for exemption (which generally exempts dividends to 75 per cent controlling parties). 3.The intra-group donations exemption was dropped as irrelevant. Note: Capital gains and losses remain freely transferable because all companies are treated like a division. Similarly, gain is triggered upon conversions from capital to ordinary and from ordinary to capital as if the subsidiaries were a single taxpayer.

De-Grouping Charges 1.The de-grouping charge generally remains as before: Gain/loss is triggered whenever the buying and selling companies are no longer linked within a single group. No time limit exists for the de-grouping charge. 2.The de-grouping charge has been softened slightly to accommodate mergers and acquisitions. Both the seller and the buyer must remain linked to one another but need not remain part of the “same group” (see example next page).

De-Grouping Example 1.Under old law, the de-grouping charge applied on the sale of S1 shares because S1 and S2 were no longer part of the same group after the sale. 2.Under new law, the de-grouping charge does not apply because S1 and S2 remain linked to one another. Parent S1 S2 Acquiring (2) Parent sells S1 shares (1) S1 Sells Assets to S2

Unbundling Nature of the Transaction Unbundling Parent 3 Million value (ignoring subsidiary) Subsidiary 1 Million value Public

Unbundling Transactions: Major Changes 1.The regime remains mandatory because of the multiplicity of taxpayers involved. 2.Taxpayers can recapitalise the subsidiary shares before unbundling. 3.All prohibitions against nominees were dropped. 4.Unbundling distributions can be made to any member within a group, not just a member that controls 75 per cent of the unbundling parent company. 5.The anti-avoidance rules against convertible instruments were dropped. 6.An unbundling company can freely distribute unbundled shares to a tax-exempt organisation.

Unbundling Transactions: Major Issue Outstanding 1.As under old law, tax-free distributions offshore are prohibited. 2.If an unbundling company makes a distribution to a foreign shareholder with a more than 5 per cent interest, the unbundling is taxable “to the extent” the distribution is made to that shareholder. 3.Practical issues continue to exist with the rule. For instance, what happens if the shareholders vote to unbundle when no foreign shareholders are present and a large foreign shareholder acquires shares by the time of actual unbundling distribution? 4.Query whether inbound unbundlings should be allowed (i.e., distributions to a South African by a foreign company). Again section 9E is at issue.

Liquidations Nature of the Transaction Parent Liquidating Sub Factory 100 value 35 base cost Sub Shares 100 value 20 base cost

Liquidations: Major Changes 1.The new regime has become wholly elective. 2.Tax-free treatment now fully applies to the parent company surrendering the shares (in addition to the subsidiary liquidating assets). 3.Foreign subsidiaries can receive rollover treatment when liquidating into South African parent companies (query how to apply section 9E?) Note:Capital gains and losses continue to be freely transferable because both the parent and subsidiary companies are treated like a division. Similarly, gain is triggered upon conversions from capital to ordinary and from ordinary to capital as if the subsidiaries were a single taxpayer.

Stamp Duties, MST and UST 1.The basic relief from MST and UST continues to apply: All shares acquired are exempt, and Receipt of unbundled shares is also exempt (as initially intended). 2.However, stamp duties continue to apply upon the issuance of shares in corporate reorganisations. The tax on issuance remains as a matter of administration.