This BGR applies from 22 June 2020 until it is withdrawn, amended or the relevant legislation is amended.
This BGR provides clarity on what constitutes an unbundling transaction when an unbundling company having non-qualifying shareholders unbundles shares in an unlisted unbundled company.
Section 46 provides roll-over relief when an unbundling company distributes all of its equity shares in an unbundled company to its shareholders under an unbundling transaction. The definition of “unbundling transaction” contains requirements relating to the unbundling company, unbundled company and shareholders of the unbundling company. This BGR examines the qualifying shareholders requirement in paragraph (a)(i)(bb) of the definition of “unbundling transaction” in the context of a resident unbundling company holding shares in a resident unlisted unbundled company. The applicable part of the definition reads as follows:
"46. Unbundling transactions.—(1) For the purposes of this section, ‘unbundling transaction’ means any transaction—
(a) (i) in terms of which the equity shares in a company (hereinafter referred to as the “unbundled company”), which is a resident that are held by a company (hereinafter referred to as the “unbundling company”), which is a resident, are all distributed by that unbundling company to any shareholder of that unbundling company in accordance with the effective interest of the shareholders in the shares of that unbundling company, and if—
(aa) all of the equity shares of the unbundled company are listed shares or will become listed shares within 12 months after that distribution;
(bb) that shareholder to which that distribution is made by that unbundling company forms part of the same group of companies as that unbundling company; or
(cc) that distribution is made pursuant to an order in terms of the Competition Act, 1998 (Act No. 89 of 1998), made by the Competition Tribunal or the Competition Appeal Court; and”
Subitems (aa) and (cc) of the definition do not stipulate any shareholder requirements for the unbundling company when the shares in the unbundled company are listed or will be listed within 12 months after the distribution or when they are distributed pursuant to an order under the Competition Act. However, under subitem (bb) when the unbundled company is unlisted, the shareholder must be part of the same group of companies as defined in section 41 as the unbundling company.
The issue arises as to what effect the wording of subitem (bb) has on an unbundling transaction when the unbundling company has non-qualifying shareholders. More specifically, does the presence of non-qualifying shareholders mean the whole transaction or only part of it does not meet the definition of “unbundling transaction”.
The words in paragraph (a)(i) require the unbundling company to distribute all the shares it holds in the unbundled company to any shareholder of that unbundling company in accordance witctive interest of the shareholders in the shares of that unbundling company. These words make it clear that the unbundling company may not retain any shares in the unbundled company and also contemplate that all holders of shares in the unbundling company must participate in the distribution in accordance with their effective interests. Such shareholders include all shareholders holding equity shares in the unbundling company regardless of the size of their holdings. The further requirement in subitem (bb) is that “that shareholder” to which “that distribution” is made must be part of the same group of companies as the unbundling company. This wording may create some uncertainty because the opening words contemplate all shareholders of the unbundling company while subitem (bb) contemplates only shareholders of the unbundling company that form part of the same group of companies as the unbundling company.
The intention of subitem (bb) is to make the distribution to shareholders forming part of the same group of companies as the unbundling company an unbundling transaction, while excluding from an unbundling transaction distributions to shareholders not forming part of that group of companies. In other words, the presence of non-qualifying shareholders does not invalidate the entire unbundling transaction but only that portion relating to the non-qualifying shareholders. Consequently, the part of the distribution to the non-qualifying shareholders must be dealt with outside section 46 under general principles, while the part of the distribution to shareholders forming part of the same group of companies as the unbundling company must be dealt with under section 46, assuming the other requirements of that section are met.
The exact tax treatment for the unbundling company and its non-qualifying shareholders, for the part of the distribution to the non-qualifying shareholders, will depend on the facts of the particular case but is generally likely to be as follows for a resident unbundling company and its resident non-qualifying shareholders:
Paragraph (a)(i) of the definition of “unbundling transaction” does not require other holders of shares in the unbundled company, that is, shareholders other than the unbundling company, to distribute their shares.
This article first appeared on sars.gov.za.
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