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Three tax consequences that apply to amalgamation transactions

by , 14 June 2013
Telecoms giant, Orange has expanded its reach in South Africa through a deal with Nashua Mobile. The deal will allow Orange to extend its brand presence in the country with products aimed at South Africans who travel to countries such as France and Botswana, reports Business tech. While corporate reorganisations provide an opportunity for companies to mutually benefit from each other, there's legal framework that governs corporate reorganisations. So if you're considering a corporate restructure, here are the three tax consequences that apply to amalgamation transactions...

According to The Practical Tax Loose Leaf Service, an amalgamation transaction takes place when one company (called the amalgamated company) sells its assets to another company (the resultant company), in exchange for shares.

This is the case for amalgamations, mergers or conversions as well as liquidations.

This change to the structure of a business has three tax consequences that you need to abide by.

Beware of these three tax consequences…

  1. The amalgamated company is deemed to have disposed of its capital assets at their base cost. And, the resultant and the amalgamated companies are deemed to be the same person for the date of acquisition of the assets, the respective base cost of the capital assets and any valuation for CGT purposes. In other words, this means the resultant company effectively steps into the amalgamated company's shoes.
  2. The amalgamated company is deemed to have disposed of its trading stock at its tax cost. In addition, the resultant company and the amalgamated company are deemed to be the same person for the date of acquisition of the trading stock, together with any expenses incurred in the acquisition of the trading stock.
  3. The amalgamated company is deemed to have disposed of an allowance asset at its tax value. The resultant company and the amalgamated company are deemed to be the same person for the purposes of allowances and recoupments.

So as you can see, when it comes to trading stock, as well as allowance and capital assets, it's important to know the tax consequences that apply to  amalgamation transactions.

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