Asset-for-Share Transfers

Asset-for-Share Transfers: The Basics

An asset-for-share transaction, as articulated in section 42 of the Income Tax Act, Act 58 of 1962 (herein the ”ITA”), involves the exchange of assets (such as immovable property) for shares within a company. Instead of a cash payment, the seller receives shares in the acquiring company, effectively becoming a shareholder.

The Role of Section 42

Section 42 of the Income Tax Act of South Africa provides a tax-neutral mechanism for such transactions. It allows for the deferral of any immediate tax consequences that would arise from the transfer of assets in exchange for shares. In other words, the parties involved can defer paying capital gains tax or recoupment of allowances until a future date, usually when the shares received are disposed of.

Requirements and Conditions

To qualify for the tax deferral under Section 42, certain conditions must be met:

  1. Companies Involved: Both the transferring company (the seller) and the acquiring company (the buyer) must be South African tax residents.
  2. Asset Types: The assets being transferred must fall within the scope of Section 42, which includes various categories such as land, buildings, machinery, patents, trademarks, and mining rights.
  3. Share Issuance: The acquiring company must issue shares as consideration for the transfer of assets. These shares must be issued directly to the seller and not to any other entity.
  4. Approval: The transaction must be approved by the Commissioner of the South African Revenue Service (SARS). This approval is crucial for ensuring compliance with the provisions of Section 42.
  5. Continuity of Business: The acquiring company must continue to use the assets in the same trade or business for which they were used by the transferring company.

Benefits of Asset-for-Share Transfers

Asset-for-share transactions offers several benefits to both parties involved:

  1. Tax Deferral: By deferring capital gains tax or recoupment of allowances, the seller can preserve cash flow and potentially reduce their tax liability in the short term.
  2. Exemption on Transfer Duty:  the Transfer Duty Act (40/1949) provides an exemption on the payment of Transfer Duty on the transaction in terms of Sec 9(1)(l)9i) and/or Sec 9(15A).
  3. Maintains Business Continuity: These transactions allow for the seamless transfer of assets while ensuring continuity in the operations of the acquiring company.
  4. Shareholder Diversification: For the seller, receiving shares in the acquiring company diversifies their investment portfolio and provides an opportunity for potential future returns through dividends and capital appreciation.


Asset-for-share transfers under Section 42 of the Income Tax Act of South Africa offer a tax-efficient mechanism for restructuring, mergers, and acquisitions. However, it’s crucial for parties involved to carefully navigate the requirements and conditions stipulated under Section 42 to ensure compliance and maximize the benefits of such transactions.