Page 644 - SAIT Compendium 2016 Volume2

IN 75 (2) Income Tax acT: InTeRPReTaTIon noTes IN 75 (2)
occurs. The Act contains two de nitions of ‘group of companies’, namely, a wider de nition in section 1(1) and a narrower de nition in section 41(1). The narrower de nition generally applies for the purposes of the corporate rules but is also used elsewhere in the Act. The de nition in section 41(1) starts with the de nition in section 1(1) and then proceeds to exclude certain companies and shares by way of a proviso. This Note is concerned with the application and effect of that proviso.
3. The law
The de nitions in the Act which are used in this Note are reproduced in the Annexure.
4. Application of the law
4.1 Interpretation of the proviso
The rst requirement in the de nition in section 41(1) is that there must be a ‘group of companies’ as de ned in section 1(1). Paragraphs (i) and (ii) of the proviso then proceed to exclude certain companies and shares from consideration. At issue is whether, after excluding the companies and shares listed in the proviso, the remaining companies meet the requirements set out in the de nition in section 1(1) and comprise a group of companies under the de nition in section 41(1). If not, the corporate rules may not apply to a transaction conducted between those remaining companies. Craies, Statute Law states the following on the effect of a limiting proviso:*
‘[T]he effect of an excepting or qualifying proviso, according to the ordinary rules of construction, is to except out of the preceding portion of the enactment, or to qualify something enacted therein, which but for the proviso would be within it;.......’ ‘
In Jennings & another v Kelly Viscount Maugham cited the following extract from Kent’s Commentaries on American Law† with approval‡
‘The true principle undoubtedly is, that the sound interpretation and meaning of the statute, on a view of the enacting clause, saving clause, and proviso, taken and construed together, is to prevail.’
The effect of applying the proviso to the main enacting clause, namely, the de nition in section 1(1), is to exclude from consideration any company listed in paragraph (i) of the proviso and any shares disquali ed as equity shares by paragraph (ii) of the proviso. For a group of companies to exist it must have a ‘controlling group company’ and one or more ‘controlled group companies’. A group that does not have a ‘controlling group company’ after applying the proviso cannot comprise a ‘group of companies’ for the purposes of the de nition in section 41(1). Likewise, a company whose equity shares are deemed not to be equity shares by paragraph (ii) of the proviso cannot have a controlling group company and will accordingly be excluded from forming part of a ‘group of companies’ as de ned in section 41(1).
Example 1 – Interpretation of the de nition in section 41(1)
Facts:
A, a company, was incorporated in the United States of America and is effectively managed in that country. It directly holds 100% of the equity shares in two companies that are incorporated and effectively managed in South Africa, namely, B and C. C directly holds 100% of the equity shares in D which is also incorporated and effectively managed in South Africa. All of the shares are held on capital account and there are no contractual obligations, rights or options to purchase or sell the shares under particular circumstances.
Result:
Application of the de nition in section 1(1) to A, B, C and D
A, B, C and D meet the requirements of the de nition in section 1(1) because A directly holds at least 70% of the equity shares in B and C. As such, B and C are ‘controlled group companies’ as de ned. A indirectly holds at least 70% of the equity shares in D through another controlled group company, namely, C. C and D meet the de nition in section 1(1) because C holds at least 70% of the equity shares in D.
Application of the proviso to the de nition in section 41(1) to A, B, C and D
A is excluded from consideration as part of the group of companies by paragraph (i)(ee) of the proviso as it is a foreign incorporated company which is effectively managed in the United States of America. None of the exclusions in paragraph (i) or deeming provisions in paragraph (ii) of the proviso apply to B, C or D. The de nition in section 1(1) must now be re-applied to these companies (B, C and D) to determine if there is a group of companies for the purposes of the corporate rules, bearing in mind that A has been eliminated as part of the group.
Application of the de nition in section 1(1) to B, C and D
Neither B nor C is a controlled group company because A has been excluded from consideration and as a result there is no company still under consideration which alone or together with other permitted companies hold 70% or more of the equity shares in B or C. In the absence of a controlling group company and a controlled group company, B and C are not a ‘group of companies’ as de ned. C and D are a group of companies for purposes of the corporate rules because – • C is a ‘controlling group company’ while D is a ‘controlled group company’; and
• C satis es the requirement that ‘the controlling group company’ directly holds at least 70% of the equity shares in at least one ‘controlled group company’.
* 7 ed at 218. This passage was cited by Botha JA in Mphosi v Central Board for Co-operative Insurance Ltd 1974 (4) SA 633 (A) at 645 when considering the true function and effect of a proviso.
† 12ed, vol 1 at 463.
‡ [1940] AC 206, [1939] 4 All ER 464 at 470.
636 saIT comPendIum oF Tax LegIsLaTIon VoLume 2