Tjaart de Beer

So much has been written about shares and companies, but what about a member’s interest held in a close corporation (“CC”)?

As from the inception of the New Companies Act No. 71 of 2008 (“the Act”) on 1 April 2011, CC’s are no longer available for incorporation. The Act also only allows companies falling within the categories listed in section 8 of the Act to be incorporated

So, what about CC’s? Are they to be forgotten?
No, luckily those still in business may continue to do business and may be sold. The Close Corporations Act, 1984 remains applicable and must be read in conjunction with the Act in those areas where applicable.

CC’s operates differently to companies whereby the party who receives member’s interest is the same party responsible for the management of the CC, whereas in a company one can have shareholders and different parties forming a board of directors responsible for the management of the company.

As time goes by and opportunities arise, there might also be a need to restructure the current arrangement of a company or CC to make the most of this opportunity, but like always, the South African Revenue Service (“SARS”) would like its cut. This cut can be quite substantial depending on the opportunity, so, in accordance with sections 41 to 47 of the Income Tax Act No. 58 of 1962 (“the Tax Act”), as amended from time to time, special provision is made for clever restructuring through rules (“the Rules”) relating to company formations, share-for-share transactions, amalgamation transactions, intra-group transactions, unbundling transactions and liquidation distributions.

More specifically, and more common is the application of section 42 of the Tax Act which provides for some tax-free rollover relief by deferring the securities transfer tax implications for at least 18 months but only if the provisions are adhered to. A failure to adhere to the provisions will trigger certain anti-avoidance provisions in the event that the company that acquired the assets, disposes of the assets within 18 months of acquisition[1].

In another instance, a Section 42 Asset-for-Share transaction entails the transfer or disposal of an asset for an amount equal in its value to acquire equity shares in that company. Caution must be taken however as this type of transaction requires the detailed attention and high-level input from both a corporate or commercial attorney and an accountant or auditor.

A question begging to be answered is, whether the Rules are applicable to a CC and its members’ interest when it comes to restructuring? Section 41 of the Tax Act defines a member’s interest to be interpreted as one would interpret a share in relation to a company:
‘equity share’ in relation to a company, means a share or part thereof in the equity share capital of that company or a member’s interest in a company which is a close corporation;

Even though the more common type of entity is a company and most, if not all, legislation refers to “companies” and “shares”, rather than a “CC” and “member’s interest”, the detail lies in the definitions to determine its applicability. Therefore, the Rules of restructuring are applicable to CC’s.

As mentioned, an accountant or auditor must be consulted too as SARS has to be approached to deliver a ruling on the particular matter, granting the appropriate relief in accordance with the Tax Act. This can be done based on the documentation drafted by a corporate or commercial attorney setting the transaction and restructuring structure out in detail.

  • [1] Dated visited: 21 November 2018 at 09:38.

This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice.