Proposed changes to reduce the ambit of a de-grouping charge affecting past intra-group transactions
Proposed changes to reduce the ambit of a de-grouping charge affecting past intra-group transactions
By: Bruce Russel
Director: Tax
Section 45 of the Income Tax Act (ITA) offers roll-over relief for intra-group transactions, deferring any income tax consequences from asset transfers between group companies. However, subsection 45(4) of the ITA includes provisions for a claw-back of deferred income tax under specific circumstances, known as a de-grouping charge.
The de-grouping charge may occur if:
- Within six years of the intra-group transaction, the transferee company ceases to be part of the same group as the transferor company.
- Within six years of the transaction, the transferee company ceases to be part of any group in relation to a controlling group company of the transferor company.
Notably, a group of companies may encompass those directly or indirectly held by a controlling group company. Consequently, the scope of the de-grouping charge is broad and could trigger income tax consequences if changes in shareholding takes place that affects the shareholding structure of a group of companies that existed at the time of the intra-group transaction. For instance, a de-grouping charge may arise from a transfer of shares in an indirect holding company, even if two companies party to the original intra-group transaction remain part of an immediate group of companies.
In Annexure C to the 2024 Budget Review, the National Treasury proposes amendments to limit the scope of the de-grouping charge. This welcomed amendment aims to narrow the charge’s applicability in cases of shareholding changes. Specifically, the proposal suggests that the de-grouping charge should not apply if the companies involved in the intra-group transaction remain part of another group of companies.