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[FAQ] The sale of assets between group companies
- 05 February 2021
- Christo Theron
Background
A company is currently selling its fixed assets to another group company. This ranges from furniture and fittings and office equipment to land. Both group companies are registered VAT vendors and all the assets to be sold from the one group company to the other group company will be subject to VAT. The VAT on this transaction will cause a cash flow issue in the group companies as the one company will have to pay the output tax over to SARS and the other company will receive the input tax refund at a much later stage. The sale will not be paid by the purchasing company but instead be set off against the loan payable to the purchaser of the assets.
Does the VAT Act make provision for zero-rated intra-group supplies?
Answer
The VAT Act
Section 8(25) of the VAT Act determines that where goods or services are supplied by a VAT vendor to another VAT vendor, the two vendors are regarded to be one and the same person for the purpose of the supply of the goods or services or any subsequent supply thereof. This rule only applies if the provisions of section 42, 44, 45 or 47 of the Income Tax Act are complied with.
The proviso to the section determines that the section 8(25) relief is not available to a supply contemplated in section 42 or 45 of the Income Tax Act unless the supply is a supply of an enterprise or part of an enterprise which is capable of separate operation and where the supplier and the recipient have agreed in writing that such enterprise or part thereof is disposed of as a going concern.
Application of the principles
The VAT Act does not contain any zero-rated provisions with regards to intra-group supplies (except in the case of an intra-group supply of a going concern as envisaged in section 11(1)(e) of the VAT Act).
The only intra-group relief is provided by section 8(25) of the VAT Act that essentially requires that the intra-group supply must be ignored for VAT purposes if the arrangement constitutes a corporate restructure as envisaged in sections 42, 44, 45 or 47 of the Income Tax Act. In the case of section 42 and 45 restructuring arrangements, the supply must also constitute a supply of an enterprise or part thereof capable of separate operation and the parties must agree in writing that it is a supply of a going concern.
Webinar Commentary
Further webinar commentary on Company Formations Series can be accessed here.