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Amalgamations under section 44 of the Income Tax Act not necessarily amalgamations under section 113 of the Companies Act

If two companies undertake an amalgamation transaction which qualifies for tax relief under section 44 of the Income Tax Act, it does not mean that section 113 of the Companies Act which deals with amalgamations and mergers necessarily applies.

Section 113 of the Companies Act deals with statutory amalgamations and mergers, and certain consequences flow from it as set out in the Companies Act, including the automatic transfer of assets, liabilities, rights and obligations upon implementation. This automatic transfer is often why parties choose to implement a statutory amalgamation or merger, because without it, they must ensure each relevant asset is transferred and liability is assumed under the contract, third parties may need to consent to the transfer, and permits and licenses may need separate treatment.

The companies have to elect to apply section 113. If a transaction or series of transactions can be implemented through ordinary corporate actions rather than through the statutory amalgamation and merger mechanism, then the company can just follow those ordinary corporate actions.

For example, an amalgamation transaction which qualifies for tax relief under section 44 of the Income Tax Act could involve a sale of all or the majority of the assets or business of a company. Unless the parties want to utilise section 113, the transaction can be done under section 112 of the Companies Act dealing with the sale of all of the greater part of the assets or undertaking of a company.

There is some debate that if the overall transaction is in substance an amalgamation or merger, whether it should proceed under section 113. However, many tax-driven section 44 restructurings have historically been implemented without relying on the statutory merger provisions, provided the requisite Companies Act approvals for the asset disposal and subsequent steps are obtained. In addition, if not all of the assets and liabilities are transferring under the transaction, then it clearly is not a section 113 transaction.

In summary, the relevant sections of each Act that must be applied must be analysed separately, under the terms of that relevant Act. What is called an amalgamation under one Act may not necessarily mean all amalgamation sections in the other Act apply.

 

About the author

Abigail Reynolds (Corporate & Commercial Law Specialist)

Abigail Reynolds is the founder and Principal Attorney of Reynolds Attorneys. She is a Corporate & Commercial Law Attorney and Qualified Mediator, and sits on the Company Law Matters Committee of the Law Society of South Africa, as well as the Commercial, Company, Consumer and Tax Law Committee of the Cape Law Society.
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Nicole Copley

NGO law

Nicole Copley is an NGO lawyer who works for NGO clients all over South Africa and internationally. She qualified with a BA LLB LLM (Tax) from the University of KwaZulu-Natal, Durban (with a Masters in tax exemption), and is a Master Tax Practitioner SATM.

Nicole advises on, drafts and amends founding documents for and sets up every sort of organisation required by South African NGOs. She makes tax exemption and 18A (deduction of donations) applications, and applications to be registered with the Nonprofit Organisations Board. She (and her team) keep registrations up to date and assist with compliance and reporting. She also NPO reporting and other services. She advises on re-structuring and assists not-for-profits in understanding and applying the useful provisions of B-BBEE.

She also does commercial drafting work for her NGO clients, vetting and drafting agreements for them. She works for a wide range of types and sizes of organisations and aims to provide a pragmatic and efficient service. Her decades of experience in consulting to NGOs means she takes the long view, is focused on governance, ethics, credibility and sustainability and steers clients away from quick fixes, helping them build/renovate so that the organisation outlasts current office bearers.

Nicole works with other consultants to the not-for-profit sector, collaborating on training, newsletters, advising government on legislation for the sector and, most recently, a series of practical guides for the sector, called “NGO Matters”, originally published by Juta but now published by Nicole as NGO Matters Publications.

She has been a consultant since 2019.

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