Distributions in anticipation of deregistration of a company
Many companies set up special purpose vehicles (SPV) for specific transactions with the sole purpose of preserving funding, assets or operations from being affected by the rest of the company’s (HoldCo) business. The SPV is limited to the purpose for which it was created. Thus, when its purpose has been served, the SPV is redundant and inevitably becomes dormant. The dormant SPV still attracts audit and CIPC costs, among others, and Holdco will look to deregister the SPV in order to streamline HoldCo's group structure and minimise unnecessary costs.
In the course of deregistration, the SPV will have to settle liabilities and distribute assets. Companies should be mindful of the tax implications of distributions made in contemplation of deregistration, which are summarised briefly below.
Cash distributions made to shareholders, which are paid out of profits available for distribution, are treated as dividends. Ordinarily, the SPV will be liable for the obligatory 15% dividends tax for any cash distributions made to its shareholders, however, it will be exempt from dividends tax in terms of section 64F(1) of the Income Tax Act (the Act) if the beneficial owner, being the HoldCo, is a company that is resident in South Africa.
The dividend received by the HoldCo from the SPV will be exempt from normal tax in terms of section 10(1)(k)(i) of the Act.
In contrast, cash distributions made to shareholders, and which are paid out of the SPV's share capital and share premium, are treated as a "return of capital" and the SPV is required, in terms of paragraph 76(4) of the Eight Schedule to the Act, to notify the company in writing what amount of the "liquidation distribution" constitutes a "return of capital".
In order to ensure accurate tax treatment, it is imperative that the source of the distribution, whether distributable reserves or contributed tax capital, is recorded in the shareholder's resolution.
Loan account assets
Where the asset being distributed to the shareholder is a debit loan account, that distribution will constitute a disposal for capital gains tax purposes. However, as the distribution is being made by the SPV, which is wholly owned by HoldCo, and in anticipation of deregistration, that distribution qualifies as a "liquidation distribution" in terms of section 47(1)(a) of the Act. Accordingly, section 47(2)(a) of the Act will apply and there will be no immediate capital gains tax consequences as a result of the distribution. This position has been confirmed in Binding Private Ruling 198.
The distribution of an asset to a shareholder, being the distribution of the loan account, is treated as a dividend in specie. Section 64FA(1)(b) of the Act provides a dividends tax exemption if the beneficial owner of a distribution of an asset in specie forms part of the same group of companies.
The dividend in specie received by the company from the SPV will be exempt from normal tax.
The distribution of capital assets by the SPV to its shareholders will also qualify as a "liquidation distribution" and therefore will not have any capital gains tax consequences, provided the requirements of section 47 of the Act are met.
Similarly the distribution of a capital asset will be a dividend in specie where the beneficial owner is part of the same group of companies, hence exempt from dividends tax.
As the SPV is a South African resident company, it will be exempt from normal tax.
The tax benefits described above will only apply if, in terms of section 47(6)(c) of the Act, the SPV has taken steps to deregister, as contemplated in section 41(4)(b) of the Act, within 36 months of the "liquidation distribution".
In our experience, it is fairly quick and easy to comply with the steps contemplated in section 41(4) of the Act. This involves the lodgement of deregistration forms with CIPC.
It is imperative that each of the provisions is meticulously complied with in order for the taxpayer to enjoy the tax benefits provided for under section 47 of the Act. We strongly suggest consulting your tax advisor for further advice before making distributions in anticipation of liquidation, winding up or deregistration.