Page 588 - SAIT Compendium 2016 Volume2

IN 67 (2) Income Tax acT: InTeRPReTaTIon noTes IN 67 (2)
A distribution could take the form of a distribution of pro ts (dividends) or capital (return of contributed tax capital). As long as the right to participate in either of these types of distribution is unrestricted the share will be an equity share. If both these rights are restricted the share will not be an equity share.
Example 12 – Connected person in relation to a company
Facts:
XYZ (Pty) Ltd holds 51% of the equity shares in ABC (Pty) Ltd and 30% of the equity shares in MNO (Pty) Ltd. ABC (Pty) Ltd holds 51% of the equity shares in MNO (Pty) Ltd. Are XYZ (Pty) Ltd, ABC (Pty) Ltd and MNO (Pty) Ltd connected persons in relation to each other?
Result:
XYZ (Pty) Ltd is a controlling group company as it holds more than 50% of the equity shares in ABC (Pty) Ltd. ABC (Pty) Ltd is also a controlling group company as it holds more than 50% of the equity shares in MNO (Pty) Ltd. ABC (Pty) Ltd and MNO (Pty) Ltd are controlled group companies in the same group of companies. XYZ (Pty) Ltd together with ABC (Pty) Ltd hold more than 50% of the equity shares in MNO (Pty) Ltd. XYZ (Pty) Ltd, ABC (Pty) Ltd and MNO (Pty) Ltd are therefore connected persons in relation to each other under paragraph (d)(i).
Example 13 – Connected person in relation to a company
Facts:
XYZ (Pty) Ltd and MNO (Pty) Ltd each hold 50% of the equity shares in ABC (Pty) Ltd. XYZ (Pty) Ltd holds 100 Class A shares which carry a voting right of one vote per share. MNO (Pty) Ltd holds 100 Class B shares which carry a voting right of two votes per share. Are XYZ (Pty) Ltd and MNO (Pty) Ltd connected persons in relation to ABC (Pty) Ltd?
Result:
Under paragraph (d)(i) XYZ (Pty) Ltd and MNO (Pty) Ltd will be connected persons in relation to ABC (Pty) Ltd if they form part of the same group of companies as ABC (Pty) Ltd. For the purposes of paragraph (d)(i) this requirement would be met if they hold more than 50% of –
• the equity shares in ABC (Pty) Ltd; or
• the voting rights in ABC (Pty) Ltd.
MNO (Pty) Ltd holds only 50% of the equity shares in ABC (Pty) Ltd and thus does not meet the minimum shareholding requirement to be part of the same group of companies as ABC (Pty) Ltd. However, since it holds 66,67% of the voting rights in ABC (Pty) Ltd it is deemed to form part of the same group of companies as ABC (Pty) Ltd and is thus a connected person in relation to ABC (Pty) Ltd. XYZ (Pty) Ltd is not a connected person in relation to ABC (Pty) Ltd because it holds only 50% of the equity shares in ABC (Pty) Ltd and 33,33% of the voting rights in ABC (Pty) Ltd. It has thus failed both the ‘more than 50%’ equity shareholding and voting rights requirements. XYZ (Pty) Ltd is also not a connected person in relation to ABC (Pty) Ltd under paragraph (d)(v). Although XYZ (Pty) Ltd holds at least 20% of the equity shares in ABC (Pty) Ltd, another holder of shares (MNO (Pty) Ltd) holds the majority voting rights in ABC (Pty) Ltd thus disqualifying XYZ (Pty) Ltd as a connected person under paragraph (d)(v).
Example 14 – Connected person in relation to a company
Facts:
XYZ (Pty) Ltd holds 40% of the equity shares in MNO (Pty) Ltd and 30% of the equity shares in ABC (Pty) Ltd. MNO (Pty) Ltd holds 40% of the equity shares in ABC (Pty) Ltd. Are XYZ (Pty) Ltd, MNO (Pty) Ltd and ABC (Pty) Ltd connected persons in relation to each other?
Result:
MNO (Pty) Ltd together with XYZ (Pty) Ltd hold more than 50% (40% + 30%) of the equity shares in ABC (Pty) Ltd. However, none of the companies directly holds more than 50% of the equity shares in any of the companies. XYZ (Pty) Ltd, MNO (Pty) Ltd and ABC (Pty) Ltd accordingly do not form part of the same ‘group of companies’ and are not connected persons in relation to one another under paragraph (d)(i).
Example 15 – Connected person in relation to a company
Facts:
XYZ (Pty) Ltd holds 51% of the equity shares in ABC (Pty) Ltd and 10% of the equity shares in MNO (Pty) Ltd. ABC (Pty) Ltd holds 41% of the equity shares in MNO (Pty) Ltd. Are XYZ (Pty) Ltd, ABC (Pty) Ltd and MNO (Pty) Ltd connected persons in relation to each other?
Result:
XYZ (Pty) Ltd is a controlling group company of ABC (Pty) Ltd because it holds 51% of the equity shares in ABC (Pty) Ltd. XYZ’s 51% holding satis es paragraph (b) of the de nition of a ‘group of companies’. Under paragraph (a) of the de nition of a ‘group of companies’ –
• ABC (Pty) Ltd is a controlled group company because 51% of its shares are held by a controlling group company
(XYZ); and
• MNO (Pty) Ltd is also a controlled group company because 10% + 41% = 51% of its equity shares are held directly
by a controlling group company (XYZ – 10%) and a controlled group company (ABC – 41%).
All three companies are therefore part of the same group of companies and are accordingly connected persons in relation to one another under paragraph (d)(i).
580 saIT comPendIum oF Tax LegIsLaTIon VoLume 2