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11.1.1. Mergers


The income tax law generally does not prescribe the requirements necessary for there to be a merger, but rather provides for situations in which various measures taken by two or more companies in accordance with the requisite procedural requirements under the company law result in a single new company. This is broadly recognized normally to take the form of the transfer of the other assets and liabilities of the existing companies to the newly-established company and the consequent dissolution of the former. In the case of merger through a transfer of shares, this would usually be effected through the cancellation of the shares in the dissolved company in exchange for a capital return or dividends to the original shareholders or in exchange for the issue of new shares in the new company to such shareholders.

Note, however, that the introduction of the consolidation regime (see Sec. 5.3.) with effect from 1 July 2003 has lessened the significance of the tax provisions governing the above situations, with the result that the provisions in their current application are of greater relevance in cases not covered by the consolidation regime, for example, where at least one party is a non-resident entity.

Direct Tax Consequences

In the case of a transfer of assets, the direct tax consequences include the following:

  • subject to certain conditions, the normal income tax rules regarding the acquisition and valuation of business assets, whether as trading stock or capital assets subject to depreciation, will generally apply in the tax treatment of the assets acquired by the acquiring company. For the transferring company, the general rules pertaining to the disposal of trading stock and other capital assets, along with the imputed income or capital gains deemed to arise in such cases, will also generally apply. However, special rules will apply to matters such as the calculation of the cost base of the transferred asset;
  • subject to certain special provisions, the general principles governing the deductibility of expenses will continue to apply to any liabilities transferred to the new company. The losses of the dissolved company may be available for set off by the new company, subject to the satisfaction of the appropriate tests, e.g. concerning continuity of ownership or the same business test (see Sec. 7.).

In the case of the transfer of shares, the direct consequences include that as a general rule, any capital gain made by the transferring company will be disregarded. Special rules apply to particular cases, such as those involving transfers by a CFC or FIF.

Indirect Tax Consequences

The indirect tax consequences include the following:

  • in the case of a transfer of assets other than shares, where the asset transferred qualifies as a taxable asset under the GST law, the transfer thereof by the dissolving company will attract a GST at the current rate of 10% on the taxable value. Conversely, the acquiring company would generally be able to claim the input tax credit for the tax paid to the transferring company. However, concessions specifically provided for in the law may also apply to exempt certain transfers (e.g. of farmland) from being subject to the VAT;
  • the transfer of shares would normally be characterized as a supply of financial services, which is VAT exempt. This means that no VAT will be payable by the transferring company on the transfer; and
  • the transfer of assets such as immovable property and shares in a landholding entity would normally also be subject to stamp duty in certain states.