Binding Private Ruling 391
ACT: INCOME TAX ACT 58 OF 1962
SECTION: PARAGRAPH 1 – DEFINITION OF “ASSET”, “DISPOSAL” and “VALUE SHIFTING ARRANGEMENT”, and PARAGRAPH 11 OF THE EIGHTH SCHEDULE TO THE ACT
- Summary
This ruling determines the tax consequences for the partners in an en commandite partnership (the Partnership) following the termination of the Partnership and the associated distribution of partnership assets in accordance with their interests in the Partnership.
Before delving into the details of Ruling, a basic summary of the types of business partnerships will be helpful.
Partnerships are a flexible and cost-effective business structure in South Africa, offering a range of benefits and challenges for entrepreneurs and small business owners. By understanding the legal and financial considerations related to partnerships, businesses can make informed decisions about the best business structure for their needs and achieve long-term growth and success.
A partnership (or unincorporated joint venture) is a legal relationship arising from a contract between two or more persons who join together each contributing to a business or undertaking carried on in common and in which they share in its profits and liabilities.
A partnership does not create a separate legal person and each partner is taxed on his or her share of the partnership profits.
Types of Partnerships in South Africa
There are several types of partnerships available in South Africa, including:
a. General Partnership: In a general partnership, all partners have equal rights and responsibilities in managing the business, and share in the profits and losses of the business.
b. Limited Partnership: In a limited partnership, there are both general partners, who have management control of the business, and limited partners, who contribute capital but have limited involvement in the day-to-day operations of the business.
c. Joint Venture: In a joint venture, two or more businesses collaborate on a specific project or initiative, sharing the risks and rewards of the venture.
There are 2 kinds of extraordinary partnerships in South Africa, namely:
i. Silent Partnership: Some of the partners in a silent partnership are not disclosed to the public.
ii. En Commandite Partnership: An en commandite partnership is created when parties agree to carry on the partnership in the name of one or some of the partners, while the partners whose names are not disclosed are known as en commandite partners (“ECPs”).
Difference between a Silent Partnership vs. En Commandite Partnership
iii. In a silent partnership, a silent partner is liable for such silent partner’s pro-rata share of all partnership debts.
iv. In an en commandite partnership, an en commandite partner is only liable for the amount of the en commandite partner’s agreed capital contribution (i.e. there is a limitation on liability).
Legal Requirements for Formation
In South Africa, there must be an agreement between the partners of the partnership to create a partnership (oral or in writing). It is advisable that the agreement is recorded in writing via a partnership agreement to prevent any disputes from arising later on.
- Relevant tax laws
In this ruling, references to paragraphs are to paragraphs of the Eighth Schedule to the Act applicable as of 28 February 2023. Unless the context indicates otherwise any word or expression in this ruling bears the meaning ascribed to it in the Act. This is a ruling on the interpretation and application of:
- paragraph 1 – definitions of “asset”, “disposal” and “value shifting arrangement”; and
- paragraph 11.
- Parties to the transaction
The Applicant: A resident private company that is the limited partner in the Partnership.
General Partner (GP): A resident private company that is the general partner in the Partnership
Investco: A resident private company
- Description of the transaction
The purpose of the Partnership is to acquire and hold shares (Investco Shares) in the share capital of Investco. The Investco Shares currently constitute 27.01% of the issued ordinary share capital of Investco. The Partnership is not permitted to make any other investments or engage, directly or indirectly, in any other business or undertaking of any nature whatsoever (unless otherwise agreed between the partners in writing).
The Applicant and GP hold the investment in the Investco Shares via the Partnership as capital assets.
The interests of the partners in the Partnership are as follows:
- The GP holds a 15% interest in the Partnership, that is a 15% undivided share in the Investco Shares; and
- The Applicant holds an 85% interest in the Partnership, that is an 85% undivided share in the Investco Shares.
The partnership agreement provides that all amounts received by the Partnership from time to time net of expenses and provisions for anticipated expenses are apportioned among the partners in the above ratio.
The Partnership will continue for an indefinite period unless it is dissolved as a consequence of the occurrence of one of the events described in the partnership agreement. None of these events have occurred nor are any expected to occur.
The Applicant wishes to dissolve the Partnership in order that each partner can obtain a direct investment in Investco rather than holding its investment through the Partnership.
The Applicant will seek to dissolve the partnership agreement in one of the following ways:
a) By mutual agreement with GP; or
b) Failing such mutual agreement, either:
i) by notice to GP dissolving the Partnership; or
ii) by an order of the High Court of South Africa dissolving the Partnership.
There will not be any change to each partner’s bundle of rights in the Investco Shares pre- and post-dissolution of the Partnership as a result of the termination of the Partnership.
After the dissolution of the Partnership and the division of the Investco Shares between the partners:
- The Applicant will hold 22.96% of Investco directly; and
- GP will hold 4.05% of Investco directly
No payments will be made by the Applicant to GP nor will any payments be made by GP to the Applicant in connection with the dissolution of the Partnership or the division of the Investco Shares between the partners, other than professional or legal fees associated with the termination of the Partnership.
- Conditions and assumptions
This binding private ruling is subject to the additional condition and assumption that in terminating the Partnership the Investco Shares are distributed to the partners strictly in accordance with their interests in the Partnership.
- Ruling
The ruling made in connection with the proposed transaction is as follows:
a) The dissolution of the Partnership pursuant to the termination of the partnership agreement, which will result in the Applicant taking ownership of 85% of the Investco Shares, will not be treated as a “disposal” as defined in paragraph 1 of the Eighth Schedule.
b) The proposed dissolution of the Partnership will not constitute a “value shifting arrangement”, as defined.