n Business Tax and Company Law Quarterly - Interest-deduction limitation - Section 23N

Volume 6, Issue 2
  • ISSN : 2219-1585


Prior to 1 April 2014 the deductibility of interest incurred in respect of funding utilised in typical leveraged buy-outs using the provisions of sections 45 and 47 of the Income Tax Act 58 of 1962 was limited by a discretionary provision of the Act, namely section 23K. With effect from that date, the provisions of section 23N of the Act apply to acquisition and reorganisation transactions as defined and provide certainty as regards the maximum interest deduction that is permissible in the funding of such transactions.

A 'reorganisation transaction' incorporates the inter-group relief provisions of section 45 and the liquidation/deregistration provisions of section 47 of the Act, while an 'acquisition transaction' incorporates the acquisition of shares in an 'operating company' under section 24O of the Act.
In essence, the interest deduction limitation provided for in section 23N is a maximum deduction of between 39% and 60% of 'adjusted taxable income' (equivalent to a Tax EBITDA calculation), plus interest received/accrued, less interest incurred outside the parameters of sections 45, 47 and 24O.
The calculation of 'adjusted taxable income' is based on the higher of the said calculation in the tax year in which the reorganisation or acquisition transaction is entered into, the tax year prior to this date or the tax year in which the interest incurred is sought to be deducted.
The limitation rules apply to the year in which the respective transactions are entered into and the succeeding five years.

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