ma cross-border 2010 south africa

8/3/2019 Ma Cross-border 2010 South Africa

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MERGERS AND ACQUISITIONS

South Africa

Taxation of Cross-Border

Mergers and Acquisitions

2010 Edition

TAX


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Taxation of Cross-Border Mergers and Acquisitions 1

2010 KPMG Services (Pty) Limited, a South Africa private company and a member firm of the KPMG network of independent member firms affiliated with KPMG International

Cooperative (KPMG International), a Swiss entity. All rights reserved.

South Africa

IntroductionThe environment for mergers and acquisitions (M&A) in

South Africa is currently far less clement than in

previous years due to the harsh current economic

climate and the global credit and liquidity crunches. The

liquidity constraints and debt burdens have reduced the

economys growth as a whole, and led to a sharp

decrease in M&A activity. This has, however, created

increased opportunities for growth in the small to

medium-sized business segment, which remains

relatively active and buoyant, and big-players are still onthe look-out for quality assets with long-term growth

potential.

Recent Developments

A number of recent developments to the South African

legislative framework have resulted in significant

changes to the M&A environment, which has in turn

resulted in some uncertainty regarding the appropriate

method of dealing with these types of transactions from

a tax and legal perspective. Among the recent

developments over the past two years, the most

pertinent are the following:

the scrapping of the secondary tax on companies(STC) and the introduction of a withholding tax

(WHT) on dividends;

the introduction of reportable arrangementlegislation, effective as of 1 April 2008;

the proposed replacement of the currentCompanies Act in its entirety (which is expected to

be effective July 2010);

the Competition Amendment Act 1 of 2009; and the repeal of the Stamp Duties Act and its

replacement by the Securities Transfer Tax Act No.

25 of 2007 and the Securities Transfer Tax

Administration Act No. 26 of 2007.

Dividends Tax

The Taxation Laws Amendment Act, No. 17 of 2009

(TLAA) promulgated on 30 September 2009, amended

the current Income Tax Act by introducing a WHT on

dividends of 10 percent on dividends declared. The

relevant provisions have been passed into law, but are

only effective from a date to be declared in the

Government Gazette.

The new dividends WHT will replace the old STC regime

under which dividends were taxed in the hands of the

company declaring the dividend and not in the hands of

the shareholder. In a bid to align the South African

regime with tax jurisdictions around the world, South

Africa introduced the dividend tax at the shareholder

level, entitling a non-resident shareholder to tax credits

in their home country.

The STC legislation currently grants an exemption from

STC in the form of STC credits, to the extent that the

dividends received during a dividend cycle exceed the

amount of dividends declared during the dividend cycle

and the company declaring the dividend has sufficient

STC credits to shelter the dividend declared against

STC. The new dividends WHT tax does not contain a

similar exemption, but taxpayers are given five years

from the date the legislation becomes effective to use

their STC credits.

The new dividends tax became law on 30 September

2009, however, it will only take effect within three

months from a date to be announced in the

Government Gazette, which is expected to be in the

second half of 2010.

Reportable Arrangements

Reportable arrangements legislation has been

introduced in South African tax law with effect from 1

April 2008. The new provisions are far wider than those

that they replace in section 76A of the Income Tax Act.

The new provisions wider in their ambit, in that they

apply to both promoters and persons deriving a tax

benefit from the arrangement. The previous version only

imposed a reporting obligation on the person deriving

the tax benefit from the reportable arrangement. A

promoter is defined in section 80T as any person who is

principally responsible for organizing, designing, selling,

financing, or managing a reportable arrangement. The

primary reporting obligation lies with the promoter.

In certain circumstances, it may be difficult to identify

the promoter of the reportable arrangement or, given


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that the definition of a promoter cites a number of

alternative functions that may be performed in relation

to the reportable arrangement, there may be two or

more promoters. In the absence of such a written

statement, when a promoter fails to disclose the

arrangement as required, he/she could be liable for a

penalty of up to ZAR 1 million. This in itself is not a

major punitive penalty, but the reputational damage this

could cause is quite significant.

It is imperative that all parties associated with an M&A

transaction be aware of these new provisions and

conduct their actions accordingly, having regard to

appropriate disclosure of the transaction steps and the

tax consequences thereof.

Companies Act 71 of 2008

The Companies Act 71 of 2008 (the new Companies

Act) has been passed by Parliament and was signed by

the President on 8 April 2009. The earliest it can come

into force is 9 April 2010, but we understand that the

Department of Trade and Industry would like the new

Companies Act to take effect from July 2010. The new

act will replace the Companies Act 61 of 1973 (the

current Companies Act) in its entirety.

The new Companies Act introduces fundamental

changes to the current South African company law and

corporate actions. In reforming South Africas company

laws, the Governments stated objectives include

simplification the existing regime, increased flexibility,

improved corporate efficiency, transparency and

accountability, and predictable regulation.

Competition Amendment Act 1 of 2009

The Competition Amendment Act 1 of 2009 has been

passed by Parliament and was signed by the President

on 28 August 2009. Of particular importance to

business is that the Competition Amendment Act 1 of

2009 allows for criminal prosecution of directors and

managers who have either caused, or permitted a firm

to engage in cartel behavior. With the amendments, andin the light of the well-established whistle blowing

provisions, self assessment has become critical.

The amendments also introduce to our competition law

the concepts of complex monopoly conduct and market

inquiries.

The date on which the Competition Amendment Act,

2009 will be effective is still to be announced.

Securities Transfer Tax

The Stamp Duties Act, No. 77 of 1968 (the Stamp

Duties Act), required, inter alia, the registration of

transfers of unlisted securities, whereas the

Uncertificated Securities Tax Act, No. 31 of 1998 (the

UST Act) required the registration of changes inbeneficial ownership of listed securities. In practice the

two acts created anomalies and also complicated

administration. The Securities Transfer Tax Act, No. 25

of 2007 (STTA) was introduced to replace stamp duties

and UST on securities with a single tax on transfers of

listed and unlisted securities. The STTA ensures that the

rules governing both listed and unlisted securities are

consistent.

Asset Purchase or Share PurchaseThe following sections address those issues that should

be considered when contemplating the purchase of

either assets or shares.

Purchase of Assets

The decision on whether to acquire the assets of a

business or acquire the shares will depend on the

details of the transaction. The advantages and

disadvantages of both purchase mechanisms need to

be understood, if the acquisition is to be effected in the

most efficient manner, while complying with all

legislative requirements.

Asset purchases may be favored because of theinterest deductibility of funding cost and the ability to

depreciate the purchase price for tax purposes.

However, other considerations may result in an asset

purchase being far less favorable, including, inter alia, an

increased capital outlay, the inability to use the tax

losses of the target company, and no deductions or VAT

claims in respect of irrecoverable debts.

Purchase Price

When assets are purchased at a discount, no statutory

rules stipulate how the purchase price is to be allocated

among the various assets acquired. Unless the discount

can be reasonably attributed to a particular class of

asset, it should be allocated among all the assets on

some reasonable basis.

Goodwill

No provision exists for the write-off of goodwill for tax

purposes by the purchaser. Accordingly, care should be

taken to allocate the purchase price, as much as

possible, among the tangible assets, providing that such

allocations do not result in the over-valuation of any

asset.


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Depreciation

Provisions exist for the deduction of wear and tear or

depreciation on most fixed assets. Certain assets do not

qualify for such allowances.

The current write-off periods are as follows:

Asset Years

Machinery used in a process of manufacture 40% in the year it is brought into use

20% in each of the following 3 years of assessment (only if

new and unused, otherwise allowance is 20% per year

over 5 years

Aircraft 5

Light Aircraft 4

Ships 5

Passenger Cars 5

Delivery Vehicles 4

Furniture and Fittings 6

Computers (mainframe) 5

Personal Computers 3

Buildings used in manufacturing, new and unused

commercial buildings or buildings used by hotel keepers

20

Source: KPMG in South Africa, 2008

The aggregate of allowances may not exceed the actual cost of a particular asset.

In addition to the allowances granted to taxpayers in general, farmers are entitled to write off certain farming

development expenditure. This includes dipping tanks, dams, fences, certain buildings, and roads. These write-offs,

however, may not create a tax loss. In situations where the deduction of the above items would create such a loss, the

expenditure will be carried forward to a subsequent year of assessment.

The taxation of mining operations is a complex area, but a notable feature is that capital expenditure generally is allowable

in the determination of taxable income. Certain limitations (basically relating to the source of income against which it may

be offset) exist and may delay its deduction. These provisions are beyond the scope of this summary.

The following expenses relating to intangibles and items of technological property used by a taxpayer in the normal

course of his/her business may be written off for tax purposes:

Type of Assets Period of Write-off

Premiums paid for the use of machinery, land and

buildings, motion pictures, patents, designs, trademarks,

copyrights, or similar property.

Over the period for which use has been acquired subject to

a maximum of 25 years.

Leasehold improvements (it must be a requirement of the

lease agreement to effect such improvements).

Over the period of the lease, but subject to a maximum of

25 years.

Devising, developing, or acquiring any patent, design,

trademark, copyright, or other similar property.

Actual cost if less than ZAR 5,000, otherwise 5% (per

annum) of the expenditure in the case of a patent, copyright

or similar property or 10% (per annum) of the expenditure,in the case of a design or similar property. No deduction will

be allowed with respect to any trademark or similar property

acquired on or after 1 January 2004.

Revenue expenditure on scientific research undertaken for

the development of the taxpayers business or contribution

to programs approved by the Council for Scientific and

Industrial Research and undertaken by scientific bodies.

A deduction of 150% was previously allowed of any

expenditure actually incurred, during any year of

assessment, by the taxpayer in respect of activities

undertaken in the republic.

No deduction of this nature is allowed in respect of any

expenditure incurred during any year of assessment

commencing on or after 2 November 2006.

Expenditure on scientific research that is of a capital nature

and is for the development of the taxpayers business, if

certified by the Council for Scientific and Industrial

A deduction is allowed over three years of 50%, 30%, and

20% in respect of the cost of any building, plant, machinery,

implement, utensil, and article of a capital nature brought


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Type of Assets Period of Write-off

Research. into use for the purpose of research.

Discovery of novel, practical, non-obvious information, or

devising, developing or creating any invention, design,

computer program, or knowledge essential to the use of

such invention, design or computer program.

A deduction of 150% of the expenditure incurred, and an

accelerated capital allowances over a three year period of

50%/30%/20%.

Source: KPMG in South Africa, 2008

Tax Attributes

Tax losses cannot be passed on to the buyer of the

business. Recoupments in the company (that is, the

difference between proceeds and tax value) are taxable

in the hands of the seller if the values of certain assets

realized are in excess of their tax values.

Value-Added Tax (VAT)

When any of the income tax relief provisions apply to a

transaction, the supplier and recipient will be deemed to

be one and the same person for VAT purposes. This

implies that there is no supply for VAT purposes,

provided both the supplier and recipient are registered

as vendors for VAT purposes.

Any assets and/or liabilities excluded from the income

tax relief provisions will have to be considered

separately from a VAT perspective to determine the

applicable rate, if any.

When the income tax and VAT relief provisions are

applied, it was previously argued that vendors may

potentially not be entitled to recover VAT on the costs

incurred for the purposes of the transaction as input tax

deductions on the basis that the VAT was not incurred

for the purpose of making taxable supplies. However,

the South African Revenue Service (SARS) issued a

Draft Interpretation Note on 31 March 2009 in which it

stated that even though the transaction may not be

regarded a supply for VAT purposes, the VAT incurred

on goods and services acquired for the purpose of

making the supply may still qualify as input tax for VAT

purposes. The test to apply here is whether the vendor

would been entitled to an input tax deduction when

section 8(25) of the VAT Act does not apply. If the

answer is yes, input tax can still be claimed.

Where section 8(2) of the VAT Act does not apply and a

business, or part of a business that is capable of

separate operation, is sold as a going concern, VAT is

payable at zero rate (that is, charged with VAT, but at 0

percent) provided certain requirements are met. To

qualify for zero-rating, both the seller and the purchaser

must be registered for VAT and agree in writing that:

the business will be sold as a going concern;

the business will be an income-earning activity onthe date of transfer;

the assets that are necessary for carrying on suchenterprise are disposed of by the supplier to the

recipient; and

the price stated is inclusive of zero-rate VAT.

The contract can, nevertheless, provide that, should the

zero-rating for some reason not apply, VAT at the

standard rate will be added to the selling price.

Transfer Taxes

Transfer duty is payable by the purchaser on the

transfer of immovable property to the extent to which

the sale is not subject to VAT.

A notional VAT input credit is available to a vendor on

the purchase of second-hand property from a vendor

not registered for VAT. Where second-hand goods

consisting of fixed property are acquired wholly for the

purposes of making taxable supplies, the input tax

claimable is limited to the amount of the transfer duty

paid.

The transfer duty is payable on the greater of cost or

market value at the following rates:1

Persons other than natural persons: 8 percent

Natural person:

o On the first ZAR 500,000: 0 percento From ZAR 500,001 to ZAR 1,000,000:

5 percent of the value above ZAR 500,000

o In excess of ZAR 1,000,000: ZAR 25,000 plus8 percent of the value exceeding

ZAR 1,000,000

Purchase of Shares

Share purchases are often favored, because of their

lower capital outlay and the acquirers ability to benefit

from the acquisition of any tax losses of the target

company. Benefits can also be derived from existing

contracts within the target. However, the fact that there

1SARS 2009/2010 Budget Tax Guide


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is no tax deduction of the funding cost of the acquisition

represents a significant barrier to this method.

Due Diligence Reviews

It is not unusual for the vendor in a large negotiated

acquisition to open the books of the target company for

a due diligence review by the prospective purchaser,

including an in-depth review of the financial, legal, and

tax affairs of the potential target company by the

advisers to the purchaser. The findings of such a due

diligence review may result in adjustments to the

proposed purchase price and the inclusion of specific

warranties made by the seller in the legal agreement.

Tax Indemnities/Warranties

In the case of negotiated acquisitions, warranties as to

any undisclosed taxation liabilities of the company are

generally required by the purchaser from the seller. Theextent of the warranties is a matter for negotiation.

When the acquisition is not negotiated, the nature of

the acquisition precludes obtaining any warranties or

indemnities.

Tax Losses

Tax losses may be retained by the purchaser when the

shares are purchased, unless any anti-avoidance rules

apply.

Crystallization of Tax Charges

The purchaser should satisfy itself that it has been

made aware of all transfers of the assets it is acquiring.

South African income tax legislation provide for roll-over

relief on the tax consequences of intra-group transfers

of assets if certain requirements are met. Each of the

intra-group provisions contain their own specific anti-

avoidance provisions, which deem the purchaser to

have disposed of the assets at their market value on the

day that certain events occur, and to have immediately

reacquired the assets at that market value. Essentially,

the purchaser becomes liable for all of the tax that was

deferred and effectively rolled over in the intra-grouptransfer.

Pre-Sale Dividend

According to the 2009 draft Explanatory Memorandum,

the new dividends WHT can create arbitrage

opportunities for company shareholders. In particular,

there is an incentive for shareholders selling shares to

convert the sale proceeds into dividends. This

conversion eliminates capital gains, subject to a 14-

percent (half of 28 percent) tax rate, with dividends that

are exempt from tax. Economically, purchaser-funded

pre-sale dividends amount to sale proceeds and are

used almost exclusively to avoid South African tax.

The changes seek to deny the shareholder arbitrage

advantage arising from arrangements involving pre-sale

dividends that are directly or indirectly funded by

purchasers. This change covers three main issues:

dividend conversions to trading stock gross income;

dividend conversions to capital gain proceeds; and

refinement of anti-avoidance rules that ensure thattax payers selling shares may not benefit from

artificial losses generated by pre-sale dividends.

Securities Transfer Tax

Since 1 July 2008, every transfer of securities is subject

to securities transfer tax (STT) as stipulated in theSecurities Transfer Tax Act No. 25 of 2007 (STTA), and

the Securities Transfer Tax Administration Act No. 26 of

2007 (STTAA). Both the STTA and STTAA came into

force on 1 July 2008. They replace the Stamp Duties

Act No. 77 of 1968.

The STTA and STTAA apply to the transfer of shares in

unlisted South African companies, shares listed on the

Johannesburg Stock Exchange, members interests in

close corporations, as well as distribution rights. STT is

levied at the rate of 0.25 percent of the taxable amount

(according to a prescribed formula which differsdepending on whether or not the securities are listed).

The STTA defines the word transfer to include the

transfer, sale, assignment, or cession or disposal in any

other manner, of securities or the cancellation or

redemption of securities, but does not include any issue

of securities. In addition, only transfers that result in a

change in beneficial ownership will attract STT.

Compromise Benefits with Creditors

Where a company that has an assessed loss enters into

a compromise benefit with any or all of its creditors,such that the amount payable to the creditor(s) is either

reduced or extinguished, any assessed tax loss brought

forward from the preceding year will be reduced to the

extent of expenditure claimed as a deduction in respect

of such loss.

Trading Stock/Contingent Liabilities

Should shares previously acquired by a company in

exchange for fixed property or shares in any other

company (the value of which was not then taxed but

deferred) and held as trading stock, be disposed of after


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a merger or acquisition has been effected, the acquirer

will have to bear the tax liability.

Capital Gains Tax

Non-residents are subject to capital gains tax (CGT) only

on capital gains from certain South African property,

including immovable property, an interest in such

immovable property, and business assets attributable to

a permanent establishment situated in South Africa.

However, in line with international practice and double-

taxation agreements entered into by the Republic, non-

residents will not be liable to CGT on other assets, such

as shares that they own in the Republic, unless the

shares are shares in an immovable property company in

certain circumstances.

Tax Clearances

The revenue authorities will not give tax clearances topotential purchasers with respect to potential target

companies, because a taxpayers tax affairs are

confidential. Revenue may reopen an assessment up to

three years from the date of issue, and may reopen any

assessment that was incorrect due to fraud,

misrepresentation, or non-disclosure of material facts.

Choice of Acquisition Vehicle

There are a number of options available to a foreign

purchaser when deciding how to structure the

acquisition of a local resident company. The South

African Income Tax Act contains special rules relating to

asset-for-share transactions, amalgamation transactions,

intra-group transactions, unbundling transactions, and

liquidation distributions. The purpose of these provisions

is to facilitate mergers, acquisitions, and restructurings

in a tax-neutral manner. The rules are very specific and

generally do not apply cross-border, or when one of the

entities in the transaction is a not a company.

However, often the most crucial element to consider

when choosing an acquisition structure is whether to

structure the acquisition through a branch or a

subsidiary.

Local Intermediary Holding Company

The incorporation of a South African intermediary

holding company affords limited liability protection. The

intermediary holding company may separately invest in

various joint ventures rather than through one single

entity. Dividends received by the intermediary will be

exempt from STC allowing funds to be pooled at the

intermediary level for further re-investment or for

onward distribution.

Additional administrative and regulatory costs incurred

for no fiscal benefit will most likely not be tax

deductible, because the intermediary will receive no

taxable income.

Foreign Parent Company

There are generally no legal restrictions on the

percentage foreign shareholding in a South African

incorporated company. The foreign parent company

could consider charging a royalty to the South African

subsidiary where such royalty would be tax deductible

in the hands of the South African entity and where such

payment is subject to a WHT of 12 percent.

The foreign parent company could also extract profits in

the form of interest, which will be deductible in the

hands of the South African entity. There is currently no

WHT on interest paid by a South African resident to a

non-resident.

Profits could also be extracted in the form of

management fees, which should be deductible in the

hands of the South African entity and not subject to any

WHT.

Non-Resident Intermediate Holding Company

The foreign intermediary may separately invest into

various African countries and may also be subject to

foreign domestic tax anti-avoidance legislation, such as

controlled foreign company (CFC) legislation. The

intermediary would need to be established in ajurisdiction that has lower rates of WHT on dividends,

interest, management fees, and royalties than those

stipulated in the relevant double tax agreement (DTA).

Any dividends declared to the foreign intermediary will

be subject to WHT (new dividend tax), which may be

reduced by a DTA.

Local Branch

Where a group company purchases the assets of a

South African business, it may operate the business in

South Africa as a branch of the foreign company (whichmust be registered as an external company in South

Africa) or establish a local subsidiary company in South

Africa.

The South African income tax system is based on

taxable income. Taxable income is gross income

received by or accrued to a resident taxpayer, not of a

capital nature, less any exempt income and less all

allowable expenditure actually incurred in the production

of that income. Non-residents are taxed on a source

basis.


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A local subsidiary is subject to a 28-percent corporate

tax rate, while a local branch of a foreign company will

be subject to a 34-percent tax rate.

Branch profits are not subject to any WHT on their

remittance to the foreign head office.

Resident companies are, however, subject to a

secondary tax on companies (STC). This tax is levied at

a rate of 10 percent of the net amount of any dividend

declared by a company. The net amount of a dividend is

the amount by which the dividend declared exceeds the

sum of any dividends (other than certain exempt

dividends) accruing to the company in a dividend cycle.

A dividend cycle is the period commencing immediately

after the previous dividend cycle and ending on the date

on which the dividend declared accrues to the

shareholder.

Pre-tax profits may, in certain instances, be extracted

from a local subsidiary company by a foreign holding

company by way of royalties, management fees, or

interest on loans. Such payments would, however, be

subject to transfer pricing and thin-capitalization rules,

for example, as regards the rate of interest on loans.

As a local branch is not a separate entity, expenditure

payable to its foreign head office for royalties,

management fees, and interest on loans would not

generally be allowable as a tax deduction in South

Africa.

The Income Tax Act does, however, make provision for

the deduction of expenditure and losses actually

incurred outside the Republic in the production of

income, provided that such expenditure and losses are

not of a capital nature. Therefore, when the foreign

company incurs expenditure outside the Republic in the

production of the South African branchs income, such

amounts would normally be allowed as a deduction by

the branch in computing its taxable income. The amount

of the deduction would be the actual amount of the

expenditure incurred outside the Republic, which maynot necessarily equate to the market value of the goods

or services in South Africa.

The tax rates in the foreign country versus the tax rates

in South Africa would, therefore, be an important factor

in deciding whether a local subsidiary or a local branch

of a foreign company would be more favorable from a

tax point of view, especially in view of the fact that

branches are not subject to STC.

An advantage of branches is that when more than one

branch is operating in South Africa, the losses of one

branch may be set off against the taxable income of

another branch in determining the South African income

tax payable. This set-off of losses would not apply to

companies.

External Companies

Companies incorporated in other countries, but which

have a place of business in South Africa, are referred to

as external companies. On the registration of the

memorandum of an external company the external

company shall be a body corporate in the Republic

subject to the applicable provisions of the current

Companies Act. Such companies are required by the

current Companies Act to register as external

companies, and certain provisions of the act will apply

to them.

There are two ways in which the business of an

external company may be transferred to a newly

incorporated South African company without attracting

STT. First, the external company takes steps to wind

itself up voluntarily or become dissolved for the purpose

of transferring the whole of its undertaking to a

company incorporated or to be incorporated in South

Africa. This is, in effect, a corporate migration

mechanism for inbound investment. Second, a new

South African company can acquire all the shares of the

external company. This is subject to the provision that

the sole consideration for the transfer or acquisition is

the issue of shares of the new company in proportion totheir shareholding in the external company.

Furthermore, no shares may be available for issue to

any persons other than the members of the external

company.

In both instances application must be made to the High

Court, which must be satisfied that the company carries

on its principal business in South Africa.

An external company carrying on business in the

Republic that wishes to terminate its corporate

existence in a foreign country may commence its

corporate existence in South Africa immediately,

without interruption, provided it satisfies the following

requirements of the Minister of Trade and Industry:

the whole or a major part of its business isconducted in South Africa and the greatest part of

its assets is situated in South Africa;

the majority of its directors are or will be SouthAfrican citizens;

the majority of its shareholders are resident in theRepublic;


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its registration and incorporation in the foreigncountry will be terminated in accordance with the

laws of that foreign country;

it has lodged the necessary documents with theRegistrar of Companies and has paid all fees and

duties payable under the current Companies Act orany other act; and

it has complied with such requirements as theregistrar may deem necessary.

The minister may, subject to the above conditions being

met and with effect from the date of termination of its

registration and incorporation in the foreign jurisdiction,

effect the necessary registration in South Africa and

cancel the registration as an external company.

External Companies in Terms of the New Companies

Act

The provisions of the new Companies Act concerning

the registration of external companies do not differ

significantly from the current position as described

above, although they do stipulate (unlike under the

current Companies Act) what activities, if conducted in

the Republic, will constitute conducting business or

non-profit activities requiring the external company

engaging in such activities to register as a branch.

The procedure for registering a branch under the new

Companies Act is not entirely clear at this stage (theregulations dealing with the procedural aspects of the

new legislation have not yet been passed), but we

envisage that although the procedure may be less

onerous, it would not differ substantially from the

procedure under the current Companies Act.

Joint Ventures

When acquisitions are to be made together with other

parties, the choice of an appropriate vehicle is

important. Generally, such ventures can be conducted

through partnerships, close corporations, companies, or

trusts.

While partnerships are ideally suited for joint ventures,

the lack of limited liability, the joint and several liabilities

for debts, and the lack of separate legal existence limit

their use. When a partnership is used, its taxable

income is first determined and then apportioned

between the partners in accordance with their

respective interests.

Another vehicle that may be used is a close corporation.

A close corporation is, to all intents and purposes,

treated as a company for tax purposes. A perceived

advantage of a close corporation over a company is that

fewer statutory formalities are associated with the

former. A limitation, however, is the provision that

prohibits companies and persons other than natural

persons from having an interest in a close corporation.

While the new Companies Act will still recognizes pre-

existing close corporations, from inception of the new

Companies Act, no new close corporations will be

incorporated/registered.

Business can also be conducted through a trading trust,

which is taxed at progressive rates on a basis similar to

that for taxation of natural persons, thereby possibly

offering a limited tax opportunity. There may be

statutory limitations in terms of the current Companies

Act if the number of trustees, or in some cases the

number of beneficiaries, exceeds 20 persons.

Choice of Acquisition FundingThe consideration of the tax treatment of interest and

dividends plays an important role in the choice between

debt and equity funding. A hybrid instrument, which

combines the characteristics of both debt and equity,

may also be used to finance the purchase

Debt

An important advantage of debt over equity is the

greater flexibility it provides. Debt can be introduced

from any company within a group, or from a financial

institution, or any other third party. In addition, debt can

be varied as a group's funding requirements change,

whereas any change in equity, particularly a decrease,

can be a complex procedure.

Also, as a method of remitting profits from the

subsidiary, using as much debt as is possible and

remitting income as interest is, in comparison to

dividends, currently more tax-efficient. This is because a

dividend attracts tax in the form of STC (or dividends

withholding tax in the future) and is not tax deductible in

the hands of the distributing company. On the other

hand, interest is typically tax deductible (subject to

meeting the requirements of the general deduction

formula).

For these reasons, there is an advantage in funding the

investment in South Africa with as much debt as

possible, rather than raising equity. But the subsidiary

should not be thinly capitalized and transfer pricing rules

concerning rates of interest charged between

connected parties should be complied with, as should

the Exchange Control requirements, discussed later in

the chapter.


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It should also be noted that the purpose of the loan

funding is crucial, if the interest is to be tax deductible in

the hands of the South African subsidiary. This is

because, typically, only interest paid on funding used to

acquire assets that produce income will be tax

deductible.

Moreover, to prevent foreigners or foreign-owned

companies from gearing their South African operations

with excessive local debt, restrictions are placed on the

local borrowings of such resident companies. The

regulations apply to affected persons. The effect of the

restrictions is that an affected person may only borrow

funds from local sources up to a maximum of a

percentage of its effective capital, calculated in

accordance with a stipulated formula. This in turn also

restricts the amount that a non-resident can borrow

locally to finance a foreign direct investment in South

Africa.

Deductibility of Interest

When funds are made available to the borrower in

South Africa, the interest earned by the lender, being

from a South African source, will, in most cases, be

subject to normal income tax. The tax that can be

imposed may be limited by a tax treaty. Interest

received by or accruing to a person who is not a

resident is, in most cases, exempt from tax in South

Africa.

Interest incurred on borrowed funds will usually be

allowed as a deduction, provided the funds are directed

towards earning income taxable in South Africa.

Interest on foreign loan funding can be remitted abroad,

provided the South African Reserve Bank (SARB) has

previously approved the loan facility, the repayment

terms, and the interest rate charged on the loan.

Approval from the SARB must be obtained by the South

African exchange control resident before any foreign

financial assistance may be accepted. This is to ensure

that the repayment and servicing of loans do not disruptthe balance of payments. For loans, this would entail

providing full details of the loan to be received, the

purpose of the loan, the repayment profile, details of all

finance charges, the denomination of the loan, and the

rate of interest to be charged. The loan itself does not

need to be approved by the SARB for the funds to flow

into South Africa, but, as already noted, the non-

approval of the loan may result in restrictions on the

repayment of the loan as well as any disinvestment

from South Africa.

The SARB will usually accept an interest rate that does

not exceed the prime lending rate in South Africa when

the loan is denominated in ZAR. Where the loan is

denominated in foreign currency, the SARB would

accept a rate that does not exceed the relevant inter-

bank rate. Accordingly, the SARBs requirements are

not entirely in line with the thin-capitalization provisions

as far as the determination of an interest rate is

concerned. KPMG in South Africa is of the view,

however, that should the circumstances be explained to

the SARB, a higher interest rate more in line with

acceptable transfer pricing rates may be acceptable to

the SARB.

Withholding Tax on Debt and Methods to

Reduce or Eliminate

Since 1 October 1995, dividends paid to non-residents

have not been subject to non-resident shareholders tax.

These dividends are, however, subject to STC. The new

dividends WHT will be introduced at a rate of 10

percent, which may be reduced by a tax treaty.

There is no WHT on interest payments to non-residents.

Checklist for Debt Funding

Thin-capitalization in respect of the debt to equityratio of the company.

Transfer pricing in respect of the interest ratescharged.

The possibility of higher rates applied to taxdeductions in other territories.

Equity

A purchaser may use equity to fund its acquisition,

possibly by issuing shares to the seller as consideration,

or by raising funds through a seller placing.

New share issues will not be subject to STT, but any

dividends paid by a South African company are not

deductible for South African tax purposes.

Foreign dividends (that is, sourced from outside South

Africa) are taxable, subject to certain exemptions. The

main exemption is when a resident owns 20 percent or

more of the equity share capital and voting rights of the

foreign company declaring the dividend. Certain exempt

dividends do not qualify as secondary tax on companies

(STC) credits, if they are subsequently declared by the

South African company.

Where the company is thinly capitalized, it would be

disadvantageous to increase borrowings without also

obtaining a fresh injection of equity so that the debt-to-


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equity ratio and interest cover are adequate for South

African tax purposes.

Non-tax grounds may also exist for preferring equity, for

example where a low debt-to-equity ratio is favored.

This factor is often the reason for companies choosing

hybrid funding.

Hybrids

There are no special rules relating to hybrid instruments,

other than the deemed interest on hybrid instruments

discussed above. The normal tax principles relating to

debt and equity apply. The provisions of the Banks Act,

which regulates the issue of commercial paper, and the

Companies Act, which regulates offers to the public,

may need to be considered. This will replace STC.

Discounted Securities

The tax treatment of securities issued at a discountnormally follows the accounting principles, with the

result that the issuer should be able to obtain a tax

deduction for the discount accruing over the life of the

security, if the discount amounts to interest for tax

purposes.

Deferred Settlement

The period or method of payment generally does not

influence the tax nature of the proceeds. The payment

for an asset of a capital nature can be deferred without

altering the capital nature of the proceeds. However,

where the full selling price is not clearly stipulated and

payment is based on a proportion of profits, an

inherently capital transaction may be treated as revenue

and taxed in the hands of the vendor. Likewise, care

should be taken not to have the sale proceeds

characterized as an annuity, which is specifically taxable

in South Africa.

Share Swaps

Approval from the exchange control authorities is

required for the exchange of shares in cross-border

mergers and amalgamations, or for issues of shares on

acquisition of assets. To obtain this approval, the assets

and shares must be valued.

When shares are issued are in exchange for an asset,

South African legislation deems the shares issued to be

equal in value to the market value of the asset acquired.

Moreover, the asset is deemed to have been acquired

by the company issuing the shares at the market value

of the asset on the date of acquisition.

Other Considerations

Concerns of the Seller

The concerns for a seller may vary depending on

whether the acquisition took place via shares or via a

purchase of assets. As discussed above, numerous

consequences arise on firstly whether the assets or theshares are purchased. When the assets are acquired by

the purchaser, for example, capital gains tax may be

levied on the capital gain realized on the disposal of the

assets. Furthermore, to the extent that any deductions

were claimed against the original cost of the assets and

the amount realized from the sale of the assets exceeds

the tax values thereof, the seller may experience claw-

backs, which it would have to include in its gross

income (as defined) and would, therefore, be subject to

income tax at the normal rate of 28 percent.

When the seller does not receive adequateconsideration of the disposal of its assets, the

transaction may be subject to donations tax at the rate

of 20 percent on the difference between the

consideration actually given and the market value

consideration.

To the extent that the assets are disposed of, the losses

of the seller cannot be carried forward into the new

company and would therefore be ring-fenced in the

seller, and thus lost.

When the seller decides to dispose of shares, the tax

losses in the company will remain in the company,

available for future set-off. However, when the South

African Revenue Service is satisfied that the sale was

entered into for the purpose of using the assessed loss

and that, as a result of the sale, income has been

introduced into the company to use the loss, the set-off

of the loss may be disallowed.

The sale of shares may also be subject to capital gains

tax, assuming the shares were held by the seller on

capital account. To the extent that the seller disposed of

the shares in a profit-making scheme, the proceeds of

the sale of the shares may be taxed on revenue

account, which is a higher rate than the rate of capital

gains tax. The provisions of the three-year holding rule

in the South African Income Tax Act would, however,

deem the proceeds received on the sale of shares held

for a continuous period of three years to be capital in

nature, and hence, taxed at the capital gains tax rate of

14 percent (that is, half the corporate income tax rate of

28 percent).


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Company Law and Accounting

In South Africa the operations of a company are

generally acquired by purchasing the business from the

company as a going concern, by merger, or by takeover.

In addition, the current Companies Act recognizes the

following means by which mergers and takeovers of

corporate entities can be effected:

Sale of a greater part of a companys assets(section 228)

Scheme of arrangement

Reduction of capital by way of a share buy-back

Redemption of preference shares

The new Companies Act contains a chapter that

specifically sets out the procedure for fundamental

transactions (section 115). The following transactions

are categorized as fundamental transactions for the

purposes of the new Companies Act:

A disposal of all or the greater part of the assets orundertaking of the company (section 112)

An amalgamation or merger (section 113)

A scheme of arrangement between a company andits shareholders (section 114)

A special resolution is required to authorize a

fundamental transaction. In addition, notwithstanding

the approval by special resolution, the company may not

implement the approval by special resolution without

the approval of a court if:

the resolution was opposed by at least 15 percentof the voting rights exercised on that resolution and

any shareholder who voted against the resolution

requires the company to seek court approval; or

any shareholder who has opposed the resolutionhas been given consent by a court to have the

transaction reviewed by the court.

If an 85-percent majority or less is obtained, the

company will need first to obtain court approval. If more

than 85-percent majority is obtained, the company may

proceed to implement the transaction, unless a

shareholder who opposed the transaction is successful

in applying to the court to require the company first to

obtain court approval to implement the transaction. The

court is only required to review the resolution (and not

the terms of the overall transaction) and may only set

aside the resolution if the resolution is manifestly unfair

to any class of shareholder, or if the vote was materially

tainted by conflict of interest, inadequate disclosure,

failure to comply with the new Companies Act or the

memorandum of incorporation (MOI), or there was any

other significant and material procedural irregularity.

The Securities Regulation Code on Takeovers and

Mergers (the Code) recognizes a further means ofeffecting a takeover, namely a takeover offer.

The choice will normally be influenced by negotiation

between the offering company and the target company,

which will take into account tax, security transfer tax,

and exchange control considerations, as well as the

requisite majority approval that may be required from

shareholders to approve the transaction.

Takeover Offer

The Code regulates takeover offers in respect of

affected transactions (as defined in section 440A of the

current Companies Act and discussed in more detail

below) to protect the interests of the shareholders of

the target company, and particularly those of minority

shareholders, in relation to the consideration offered for

their shares. A takeover offer is an offer to all

shareholders of the target company or to all holders of

shares of a particular class, for their shares, which, if

implemented, will either:

vest control of the target company directly orindirectly in the offering company; or

result in the offering company acquiring all theshares or all the shares of a particular class.

The procedures to be followed are laid down in the

Code and the provisions of the current Companies Act,

and require full particulars of the offering company and

the offer to be set out in a statement that must be

attached to the offer. The provisions of the Code only

apply to certain companies. They are discussed in

greater detail later in the chapter.

Where a takeover offer is accepted by holders of not

less than 90 percent of the shares (none of whom were

nominees for the offering company), the current

Companies Act (section 440(k)) provides for a procedure

that enables the shares of holders who have not

accepted the offer to be acquired compulsorily.

Takeover Offer in Terms of the New Companies Act

The new Companies Act sets out provisions relating to

takeovers and offers. Takeovers will be overseen by the

Takeover Regulation Panel (TRP) (similar to the current

Securities Regulation Panel (SRP)) and monitored in


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accordance with takeover regulations (which are

expected to be similar to the current SRP Code).

The TRP and takeover regulations will apply to a

regulated company. The definition of regulated company

is wider than companies that are currently governed by

the SRP Code. A regulated company includes a publiccompany, a state-owned company and a private

company if the memorandum of incorporation (MOI) of

the private company provides for its application or if 10

percent or more of the shares of such private company

have been transferred within the previous 24 months

(this percentage may vary, but cannot be less than 10

percent). The takeover regulations could apply to private

companies irrespective of their size, because the test is

dependent not on the number of shareholders or the

size of shareholder equity, but rather on the percentage

of shares transferred over a period.

A number of the provisions relating to the required

disclosure of share transactions, mandatory offers,

comparable and partial offers, restrictions on frustrating

action, and prohibited dealings before and during an

offer, which are currently in the SRP Code, are now

included in the new Companies Act.

The new Companies Act has provisions similar to

section 440(k) of the current Companies Act allowing a

compulsory squeeze out of minority shareholders where

90 percent or more of the shareholders have accepted

an offer to acquire the shares.

Scheme of Arrangement

A scheme of arrangement is a South African legal term

referring to a company restructuring that has been

sanctioned by the High Court of South Africa and which

is discussed in more detail later in the chapter. There

are specific rules in the current Companies Act

applicable to the term, which has nothing to do with a

tax scheme.

The current Companies Act provides for a compromise

or arrangement to be made between a company and all

or any class of its creditors, a company and all or any

class of its members, or a company and any

combination of its creditors and members. The

compromise or arrangement must be agreed to by

either a majority in number representing 75 percent in

value of the creditors (or class of creditors) of the

company, or a majority representing 75 percent of the

votes exercisable by the members or class of members.

The compromise or arrangement has no effect until

sanctioned by the High Court.

A takeover is effected in the form of a reorganization of

the issued capital of the target company. The scheme

typically provides for the cancellation or acquisition of

shares not already held by the offering company and for

the offering company to pay the agreed consideration to

the disposing shareholders.

Where a takeover is effected by a scheme of

arrangement, often shares in the company used to

effect the takeover are issued in exchange for shares in

the acquiring company. Again, the High Court must

approve the arrangement.

Scheme of Arrangement under the New Companies Act

A scheme of arrangement falls within the ambit of

fundamental transactions and must be carried out in

accordance with the procedure prescribed.

The provisions in the new Companies Act allowing for

schemes of arrangement allow greater flexibility in the

manner in which schemes of arrangement can be

effected between a company and its shareholders. To

effect a scheme of arrangement, the company would

need to comply with the requirements for approval of a

fundamental transaction and thus would not

automatically require an application to the court, as is

required by section 311 of the current Companies Act.

An independent expert must be appointed to prepare a

report, which must be submitted to all shareholders for

consideration before they vote on the scheme of

arrangement. A company cannot enter into a scheme of

arrangement if it is in liquidation or a business rescue

process.

Appraisal Rights

The new Companies Act has introduced a new concept

called appraisal rights for shareholders. The appraisal

rights apply where the company has:

amended its MOI to change the rights attaching toany class of shares in a manner materially adverse

to the rights of a particular shareholder; or

entered into a fundamental transaction.

The appraisal rights do not apply in the above

circumstances if the transaction is pursuant to a

business rescue plan that has been approved by the

shareholders. If a shareholder (the dissenting

shareholder) has given notice to the company that it

intends opposing any resolution for a matter referred to

above, and thereafter votes against the particular

resolution, the dissenting shareholder can require the

company to repurchase the dissenting shareholders


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shares at fair value. This right is afforded to the

dissenting shareholder irrespective of the majority

percentage approval obtained by the company. The new

Companies Act sets out certain formal requirements

that the dissenting shareholder needs to follow in order

to enforce its appraisal rights.

Reduction of Capital by Way of a Share Buy-Back

A company may, in certain circumstances, acquire its

own shares. A company may, by special resolution, give

a general or special approval for the acquisition of its

shares if authorized by its articles. A general approval is

valid until the next annual general meeting. A share buy-

back mechanism may also be used to effect a takeover

whereby all the shares held by the shareholders, other

than the prospective new controlling shareholder, are

acquired by the company. Upon acquisition by the

company, such shares are cancelled.

No payment for the acquisition of shares may be made

by the company if there are reasonable grounds for

believing that the company is or would, after the

payment, be unable to pay its debts in the ordinary

course of business, or if the consolidated assets of the

company (at fair market value) would, after the

payment, be less than the consolidated liabilities.

When the company acquires shares at a premium, the

premium may be paid out of reserves. Although the

current Companies Act does not prescribe a limit on the

percentage of shares that may be acquired by the

company, the company is prohibited from acquiring its

entire ordinary share capital. Furthermore, in terms of

the listings requirements of the Johannesburg

Securities Exchange SA (the JSE), any general

repurchase may not exceed 20 percent of a listed

companys issued share capital in any financial year.

Reduction of Capital by Way of a Share Buy-Back in

Terms of the New Companies Act

A company may repurchase its own shares (a share

buy-back) provided that the company meets thesolvency and liquidity test. A share buy-back may be

authorized by the board without the need for

shareholder approval. This differs from the current

Companies Act which requires a special resolution for a

share buy-back.

Redemption of Redeemable Preference Shares

Use of this avenue is limited to situations where a

holding company wishes to acquire the minority interest

in a partially-owned subsidiary. It is first necessary to

convert the shares held by the minority into redeemable

preference shares (with or without provision for a

premium) by special resolution. The redeemable

preference shares are then redeemed and the

redemption proceeds payable to the shareholders will

need to be funded out of profits available for distribution

or out of the original premium (if any) that arose on the

original issue of such shares. This form of change in

control does not require the participation of the court or

the consent of creditors.

The current Companies Act contains a specific provision

dealing with the redemption of redeemable preference

shares whereas the new Companies Act contains no

such provision.

Financial Assistance to Purchase Own Shares

Section 38 of the current Companies Act prohibits a

company from making loans for the acquisition of its

shares, except in certain limited circumstances. Section

38 does, however, contain a general exemption (section

38(2A) that allows a company to provide assistance for

the purchase of, or subscription for, shares of that

company if the company's board is satisfied that:

after the transaction, the consolidated assets of thecompany, fairly valued, will be more than its

consolidated liabilities;

after providing the assistance, and for the durationof the transaction, the company will be able to pay

its debts as they become due in the ordinary course

of business; and

the terms on which the assistance is to be givenare sanctioned by a special resolution of members.

Financial Assistance to Purchase Own Shares in Terms

of the New Companies Act

The new Companies Act includes restrictions on a

company providing financial assistance for the

subscription or purchase of its own shares, or shares in

a related or inter-related company. This restriction is

wider than section 38 of the current Companies Act,

which only applies to financial assistance by a company

for its own shares or shares in its holding company. The

new Companies Act will effectively apply to financial

assistance for buying shares of the company or any

other company within the group of companies of which

the company is a part.

The directors may authorize the provision of financial

assistance if immediately after the provision of the

financial assistance the company meets the solvency

and liquidity test, and the financial assistance has been


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approved by a special resolution passed within the

previous two years.

In addition, the directors must be satisfied that the

financial assistance is fair and reasonable to the

company. A special resolution will not be required if the

financial assistance has been given in connection withan employee share scheme (provided it meets the

requirements of the new Companies Act).

Group Relief/Consolidation

South Africas tax law does not recognize the concept

of group relief, where losses made by some group

companies are offset against profits made by other

group companies. Companies are accordingly assessed

as separate entities. However, intra-group transactions

may take place in a tax-neutral manner in certain

circumstances, mostly relating to situations in which

companies form part of the same group of companies,

by virtue of the minimum shareholding requirement of

70 percent of the equity share capital of the companies.

Transfer Pricing

The overriding principle of the transfer pricing legislation

is that cross-border transactions between connected

persons should be conducted at arms length.

Subsection 31(2) of the Act effectively provides that

where a cross-border agreement has been concluded

between connected persons for the supply of goods or

services (such as the granting or assignment of any

right such as a royalty agreement, the provision of

technical, financial or administrative services, the

granting of financial assistance such as a loan, etc.), and

such goods and services are not supplied on an arms

length basis, the Commissioner may, in determining the

taxable income of any of the persons involved, adjust

the price in order to reflect an arms length price. An

adjustment by the Commissioner may furthermore

result in a liability for STC for the South African tax-

resident company.

Dual Residency

There are few advantages in dual-residency. The losses

of a dual resident investing company cannot be offset

against profits of other South African companies.

Foreign Investments of a Local Target

Company

South Africas controlled foreign companies (CFC)

legislation is designed to prevent South African

companies from accumulating profits offshore in low-tax

countries.

When a South African resident directly or indirectly

holds shares or voting rights in a foreign company, the

net income of that company will be attributed to the

South African resident if that foreign company is a CFC

and does not qualify for any of the available exclusions.

The net income of a CFC attributable to the South

African resident is the taxable income of the CFC,

calculated as if that CFC were a South African taxpayer

and a resident for specific sections of the Act.

Consequently, both income and capital gains are

attributed. The main exemption to attributing a CFCs

income is the Foreign Business Establishment (FBE)

exemption. If a CFCs income and gains are attributable

to an FBE (including gains from the disposal or deemed

disposal of any assets forming part of that FBE), they

will generally not be attributed to the South African

resident parent.

Other Regulatory Authorities

Securities Regulation Code on Takeovers and Mergers

(the Code)

The Code, which is largely based on the City Code

issued by the London Panel on Takeovers and Mergers,

makes provision for the Securities Regulation Panel

(established by the current Companies Act) to resolve

uncertainties and disagreements. The underlying

principle of the Code is to ensure fair and equal

treatment of all holders of relevant securities during

affected transactions. The Code also provides for anorderly and structured framework within which affected

transactions are to be conducted.

Section 440 of the current Companies Act prohibits any

person from entering into an affected transaction except

in accordance with the Code, unless the panel

otherwise exempts the person. The panel also has a

general discretion to authorize, subject to such terms

and conditions as it may prescribe, non-compliance with

or departure from any requirement of the Code, and to

excuse or exonerate any party from failure to comply

with any such requirement.

Affected transactions are those that, when taking into

account any securities held before such transaction:

Vest control of any company (excluding a closecorporation) in a person (or persons acting in

concert) in whom control did not vest prior to the

transaction.

Involve the acquisition by any person (or personsacting in concert) in whom control of any company

(excluding a close corporation) vests on or after the

date of commencement of the Companies Second


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Amendment Act 1990 (section 1C) of further

securities of that company in excess of the limits

prescribed in the Rules.

Are disposals as contemplated in section 228 of thecurrent Companies Act. Section 228 of the current

Companies Act requires a special resolution for thedisposal of the whole or greater part of the

undertaking or assets of a company. This section

will not apply to a disposal between a wholly-

owned subsidiary and its holding company or

between two wholly-owned subsidiaries. An

undertaking or assets of a company, and the part to

be disposed of, shall be calculated for the purposes

of section 228, according to the fair value of the

undertaking or assets as described in financial

reporting standards.

For the purposes of the Code, control means, broadlyspeaking, a holding of securities entitling the holder to

exercise 35 percent or more of the voting rights in

general meeting, notwithstanding that such entitlement

does not involve the de facto control of the company. A

person (or persons) who hold(s) not less than 35

percent but not more than 50 percent of the voting

rights in a company is prohibited from acquiring, in any

one year, securities that carry more than 5 percent of

the voting rights in such company without making a

similar offer to other shareholders.

Companies covered by the Code include:

all public companies, whether listed or not;

statutory corporations that are resident or deemedto be resident in the Republic of South Africa; and

private companies in which the shareholdersinterest (valued at the offer price) and loan capital

exceeds ZAR 5 million and that have more than 10

shareholders.

Very briefly, the general principles of the Code include:

all holders of the same class of securities of thetarget company are treated similarly by the offering

company;

the offering company and the target furnish thesame information to all holders of securities, unless

the Securities Regulation Panel agrees otherwise;

the offer is made only after the offering companyand its financial adviser have carefully considered

whether the offering company will be able to

implement the offer;

holders of relevant securities are provided with allthe relevant and sufficient information and advice

necessary to reach an informed decision;

documents or advertisements addressed to holdersof securities are prepared with great care and

accuracy by the offering company, the target, ortheir advisers;

all parties take reasonable steps to prevent thecreation of a false market in the securities of the

offering company or the target;

oppression of a minority is unacceptable;

the board of the target company refrains fromtaking any action likely to result in the offer being

frustrated or the holders of the relevant securities

being denied an opportunity to decide on its merits

without the approval of the holders of those

securities in general meeting;

directors of the offering company and target at alltimes act only in their capacity as directors and

without regard to personal or family shareholdings;

an offering company contemplating an acquisitionthat may give rise to an obligation to make a

general offer, in an affected transaction, to all other

holders of the relevant securities, ensures that it

can, and will continue to be able to implement such

an offer; and

an underlying principle that the existing holder ofshares or securities in the target (whether or not

carrying a vote) shall be entitled to dispose of that

interest on terms comparable to the parties to an

affected transaction.

The Code regulates takeovers and mergers in South

Africa and affords protection to minority shareholders. It

attempts to maintain secrecy to prevent insider trading

and ensures an even-handed approach by the parties

involved in the negotiating process.

Please see the discussion in respect of takeovers under

the heading Company Law Considerations.

JSE Securities Exchange SA Listing Requirements

The JSE listing requirements apply to all companies

listed on the JSE and to applicants for l istings, and were

first introduced in July 1995. Several amendments have

been made to the listings requirements since. The

requirements are aimed at raising the levels of certain

market practices to international standards as well as

taking into account situations unique to the South


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African economy and culture. It is an integral function of

the JSE to provide facilities for the listing of the

securities of companies (domestic or foreign) and to

provide users with an orderly marketplace for trading in

such securities and to regulate accordingly.

The listing requirements reflect, inter alia, the rules andprocedures governing new applications, proposed

marketing of securities, and the continuing obligations

of issuers, and are aimed at ensuring that the business

of the JSE is carried on with due regard to the public

interest.

With respect to mergers and acquisitions, the JSE

listing requirements regulate transactions of listed

companies by a set rules and regulations to ensure full,

equal, and timely public disclosure to all holders of

securities and to afford them adequate opportunity to

consider in advance, and vote on, substantial changes inthe companys business operations and matters

affecting shareholders rights.

The JSE listing requirements are numerous and may be

onerous and, to comply with the various requirements,

the listed company considering a transaction with

another party will need to assess each transaction on

the basis of its size, relative to that of the listed

company, to determine the full extent of these

requirements and the degree of compliance and

disclosure needed.

Competition Commission

The Competition Commission must be pre-notified of

any merger in circumstances where certain prescribed

thresholds are attained. In terms of the South African

Competition Act, a merger occurs when one or more

companies directly or indirectly acquire(s) or

establish(es) direct or indirect control over the whole or

part of the business of another company.

The threshold test that has to be satisfied before a

merger will be regarded as notifiable is that the higher

of the annual turnover or gross assets of the target

business must be equal to or exceed ZAR 80 million and

the combined annual turnover or gross assets of the

target business, the acquiring company, and other group

companies of the acquiring company must be equal to

or exceed ZAR 560 million.

Only turnover in, into, or from South Africa and only

gross assets in South Africa or arising from activities in

South Africa must be taken into account. If these

thresholds are met, the transaction would constitute an

intermediate merger. In this case, the Competition

Commission must be notified and the approval of the

Competition Commission must be obtained prior to the

implementation of the transaction.

If, however, the higher of the annual turnover or gross

assets of the target business equals or exceeds ZAR

190 million and the combined annual turnover or gross

assets of the target business, the acquiring company,and other group companies of the acquiring company

equals or exceeds ZAR 6.6 billion, the transaction will

constitute a large merger. Again in this case, the

commission must be notified, but here the approval of

the Competition Tribunal must be obtained prior to the

implementation of the transaction.

The primary factor for consideration by the Competition

Commission and/or the Competition Tribunal (as the

case may be) is whether it is likely that the merger will

result in the substantial prevention or lessening of

competition. Ultimately, the Competition Authoritiesmust be satisfied that the companies in the market will

behave competitively and that certain prescribed public

interest factors will not be negatively affected. Factors

considered by the Competition Authorities in assessing

the transaction include, inter alia, the strength of

competition in the relevant market, barriers to entry into

the market, and the level of import competition.

Exchange Controls

No cross-border merger or acquisition should be

contemplated without due consideration being given to

the likely impact of the strictly enforced South African

Exchange Control Regulations.

The exchange control authorities allow investment

abroad by South African companies, although a strong

case would have to be made proving, inter alia, the

benefits to the South African balance of payments, the

strategic importance of the proposed investment, and

the potential for increased employment and export

opportunities. A minimum 25-percent shareholding is

generally required.

Remittance of Income

Income derived from investments in South Africa is

generally transferable to foreign investors, subject to

the following restrictions:

Interest is freely remittable abroad, provided theauthorities have approved the loan facility and the

interest rate is related to the currency of the loan,

such as U.S. dollars, at the London Interbank

Offered Rate (LIBOR).


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South Africa




Payment of management fees by a South Africancompany to an overseas company or beneficiary is

subject to exchange control approval. The amount

paid must be reasonable in relation to the services

provided. Payments of such fees by wholly-owned

subsidiaries of overseas companies are not readily

approved. Authorized dealers may approve, against

the production of documentary evidence confirming

the amount involved, applications by South African

residents to effect payments for services rendered

by non-residents, provided that the fees payable are

not calculated on the basis of a percentage of

turnover, income, sales, or purchases.

Agreements for the payment of royalties andsimilar payments for the use of technical know-

how, patents, and copyrights require the prior

approval of the exchange control authorities.

All license agreements relating to the use oftechnology in manufacture are first vetted by the

Department of Trade and Industry. Other license

agreements are submitted directly to the exchange

control authorities.

Dividends must be supported by a directorsrepresentation letter, annual financial statements, a

copy of the board resolution declaring the dividend,

a completed Exchange Control form MP79(a)

relating to local borrowings, and a covering letter

from the auditors.

Local Borrowing Restrictions

To prevent overseas-owned companies from

introducing excessive debt to their South African

operations, restrictions are placed on local borrowings.

The regulations apply to companies that are more than

75 percent foreign held and restrict financial assistance

to a maximum percentage of total effective capital in

accordance with the following formula:

300 percent + South African participation/non-resident participation x 100 percent

A 100-percent foreign-held company may thus receive

local financial assistance of up to 300 percent of its

effective capital.

Effective capital is defined to include issued share

capital and premium, retained income (or losses), other

earned reserves created out of profits, deferred tax,

outstanding dividends, the permanent portion of an

inter-company trading account with an overseas

associate or holding company, and approved

shareholders loans that are in proportion to ownership.

Financial assistance includes the lending of currency,

granting of credit, taking up of securities, concluding of

hire-purchase or lease agreements, financing of sales or

stocks, discounting of receivables, factoring of debtors,guaranteeing of acceptance credits, guaranteeing or

acceptance of any obligation, any suretyship (that is, a

contract whereby a person obliges himself/herself on

behalf of a debtor to a creditor, for the payment of the

whole, or part of what is due from such debtor, and by

way of accession to his obligation) and any buyback or

leaseback agreement.

Structuring the TransactionThe South African Income Tax Act contains special rules

relating to asset-for-share transactions, amalgamation

transactions, intra-group transactions, unbundling

transactions, and liquidation distributions. The purpose

of these provisions is to facilitate mergers, acquisitions,

and restructurings in a tax-neutral manner. The rules are

very specific and generally do not apply cross-border, or

when one of the entities in the transaction is a trust.

Mergers and Amalgamations

A merger or an amalgamation is a transaction in which

the assets of two or more companies become vested in

or come under the control of one company, the

shareholders of which then consist of the shareholders

(or most of the shareholders) of the companies that

were merged. The single company that owns or

controls the combined assets of the merged companies

may be either:

one of the companies that was merged and whoseshare capital was re-organized to enable it to be the

vehicle of the merger; or

a new company formed for the purpose of themerger.

Although the current Companies Act does notspecifically contemplate the concept of mergers and

amalgamations, the new Companies Act has introd

ma cross-border 2010 south africa

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