Intercompany loans are part of everyday financial management for many South African corporate groups. A holding company may provide working capital to a subsidiary, fund an acquisition, settle expenses on its behalf or support it through a temporary cash flow shortage.
Until recently, these arrangements usually triggered the financial assistance requirements in section 45 of the Companies Act. The Companies Amendment Act 16 of 2024 has now changed that position for certain transactions, making it easier for a company to provide financial assistance to its subsidiaries.
The amendment creates useful flexibility, although its application is narrower than the phrase “intercompany loans” might suggest. Companies still need to identify the parties involved, review their Memorandum of Incorporation and ensure that the transaction has been properly authorised and recorded.
How section 45 previously applied to intercompany loans
Section 45 of the Companies Act regulates the provision of direct or indirect financial assistance by a company to directors, prescribed officers and related or inter-related companies and corporations.
Financial assistance is broader than a conventional cash loan. It can include a guarantee, suretyship, the provision of security, a loan account or another arrangement through which one company provides financial support to another.
Before the amendment, a company providing financial assistance to a subsidiary generally had to comply with the approval process in section 45. This included obtaining authority through a special resolution adopted by shareholders within the preceding two years.
The board was also required to satisfy itself that the company would meet the solvency and liquidity test immediately after providing the assistance, and that the terms of the assistance were fair and reasonable to the company. Depending on the value of the transaction, notice may also have been required to shareholders and any relevant trade union.
For corporate groups that regularly move funds between a holding company and its subsidiaries, the process could create a considerable administrative burden.
What the Companies Act amendment changed
The Companies Amendment Act 16 of 2024 inserted section 45(2A) into the Companies Act. This provision came into operation on 27 December 2024.
The new subsection states that the provisions of section 45 do not apply when a company provides financial assistance to, or for the benefit of, its subsidiaries.
Where the exemption applies, the company no longer needs to follow the section 45 process for that transaction. This removes the statutory requirement for the shareholder special resolution, the section 45 solvency and liquidity determination, the fair and reasonable terms assessment and the related statutory notices.
The change is particularly relevant to holding companies that regularly fund their operating subsidiaries. It allows these groups to manage legitimate internal funding arrangements without repeating a formal approval process each time assistance is provided.
The exemption only applies in one direction
The wording of section 45(2A) is important because it applies to financial assistance provided by a company to, or for the benefit of, its subsidiary.
A loan from a South African holding company to its South African subsidiary may therefore qualify for the exemption. The same applies where the holding company provides a guarantee or security for an obligation of that subsidiary.
The exemption does not automatically cover every transaction between companies in the same group. Financial assistance provided by a subsidiary to its holding company remains subject to section 45, as does assistance between fellow subsidiaries or other related and inter-related companies.
Groups should therefore avoid labelling a transaction as an “intercompany loan” and assuming that the exemption applies. The legal relationship between the lending company and the recipient must be established before the approval requirements can be determined.
Foreign subsidiaries require additional care
The exemption also needs to be considered carefully where financial assistance is provided to a foreign subsidiary.
The Companies Act defines a company as a juristic person incorporated under the Act, a domesticated company or, in certain contexts, a juristic person that was registered under earlier South African company legislation. A foreign entity may satisfy the commercial understanding of a subsidiary without falling within the statutory meaning required for the section 45(2A) exemption.
As a result, financial assistance provided to a foreign subsidiary may still need to follow the original section 45 approval process. Groups with cross-border structures should confirm the status of the recipient before relying on the exemption.
The company’s MOI still needs to be reviewed
The statutory exemption does not automatically remove approval requirements contained in a company’s Memorandum of Incorporation.
Some MOIs repeat the previous section 45 requirements, while others contain additional shareholder approval thresholds for loans, guarantees, security arrangements or related-party transactions. These provisions may continue to bind the company, its directors and its shareholders even though the Companies Act no longer requires the same approval for assistance to a subsidiary.
The wording of the MOI should be read carefully. A provision that merely refers to compliance with section 45 may operate differently from a clause that independently requires shareholder approval whenever the company provides financial assistance to another group entity.
Companies should therefore review their MOIs before changing their internal approval procedures. Where a shareholder approval requirement was originally included only to mirror the old section 45 position, the company may consider amending the MOI through the required corporate process.
There may also be sound commercial reasons for retaining an approval requirement. Shareholder oversight can remain valuable where the funding is material, the company has minority shareholders or the proposed transaction could shift financial risk from one part of the group to another.
Directors remain accountable for the decision
The section 45 exemption reduces the statutory administration involved in qualifying subsidiary funding, although it does not relieve directors of their wider duties under the Companies Act.
Directors must continue to act in good faith, for a proper purpose, in the best interests of the lending company and with the required degree of care, skill and diligence. They should consider whether the company can afford to provide the funding, whether repayment is realistic and whether the transaction exposes the company or its creditors to an unreasonable level of risk.
A board resolution remains advisable even where section 45 no longer requires the previous formal process. The resolution should record the nature and amount of the assistance, the relationship between the companies, the commercial purpose of the transaction and the board’s reasons for approving it.
The loan or financial assistance arrangement should also be properly documented. This includes recording the repayment terms, interest rate, security, duration and treatment of the balance where the recipient cannot repay according to the original arrangement.
Without this evidence, an informal transfer between group companies can become difficult to explain to shareholders, auditors, lenders, liquidators or regulators at a later stage.
Tax and accounting consequences remain separate
The amendment to section 45 changes the company law approval requirements for qualifying transactions. It does not determine the tax or accounting treatment of the intercompany loan.
Companies must still consider whether interest should be charged, whether transfer pricing rules apply, whether the loan may become impaired and how it should be presented in the annual financial statements.
Cross-border loans can introduce further considerations, including transfer pricing documentation, exchange control requirements, withholding tax on interest and the tax treatment of foreign exchange movements.
The commercial terms of the loan should therefore be considered together with the company law, tax and accounting consequences. Removing the section 45 approval process does not remove these separate obligations.
A more practical approach to intercompany loan compliance
For each intercompany loan, the company should first establish whether the recipient is legally its subsidiary and whether the recipient falls within the meaning of a company under the Companies Act. It should then determine whether the financial assistance is flowing from the holding company to that subsidiary, since other directions of funding may remain subject to section 45.
The MOI and any shareholders’ agreement should be reviewed before the transaction is approved. If the statutory exemption applies and the constitutional documents contain no additional approval requirement, the board can authorise the funding through its normal decision-making process.
The supporting resolution, loan agreement and financial records should be stored together so that the company can demonstrate how the decision was reached and on what terms the assistance was provided.
For professional firms managing groups of companies, this is another area where the legal requirement depends on having a reliable view of the group structure. Identifying the holding company, subsidiary and ultimate ownership relationships is essential before the correct approval workflow can be applied.
Intersect brings the ownership data, corporate records, resolutions, supporting documents and approval workflow into one connected environment. This gives accounting and company secretarial firms a clearer basis for determining which intercompany transactions qualify for the new exemption and which still require the full section 45 process.
The amendment gives South African corporate groups welcome flexibility, particularly where holding companies regularly provide funding to local subsidiaries. That flexibility works best when the group structure is accurate, the MOI has been reviewed and every transaction remains properly considered, authorised and documented.
