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Debt to Equity – Group of Companies

Debt to Equity – Group of Companies

27 Mar 2018

Effective from the 1st of January 2018, section 19 of the Income Tax Act No. 58 of 1962 (“the Income Tax Act”), will change in the manner debt can be converted into equity for a group of companies.

Firstly, a group of companies is defined in section 41 of the Income Tax Act as -

two or more companies in which one company (hereinafter referred to as the “controlling group company”) directly or indirectly holds shares in at least one other company (hereinafter referred to as the “controlled group company”), to the extent that—

(a)        at least 70 percent of the equity shares in each controlled group company are directly held by the controlling group company, one or more other controlled group companies or any combination thereof; and

(b)       the controlling group company directly holds at least 70 per cent of the equity shares in at least one controlled group company;

From the above definition it is clear that the group of companies must have a minimum shareholding of 70% to meet the definition. Section 19(8)(e) of the Income Tax Act was amended in order to make a special exclusion for any debt benefit, in connection to a debt owed by a person to another company, which forms part of the same group of companies, and reduces or settles that debt by means of shares issued by the company, which effectively settles the debt.

The section further specifies, that the company, which would have received a debt benefit under the normal rules, will be deemed to have received the benefit and no exclusion applies, if:

  • the company did not form part of the same group of companies when the debt was incurred,; or
  • the company does not form part of the same group of companies at the time the debt is reduced or settled; and
  • shares are issued for the debt relief.

Companies, should carefully evaluate the requirements mentioned above, specifically relating to the group of company’s structures.

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