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15 March 2019
The National Treasury amended legislation governing share buy-backs and dividend stripping in 2017 and 2018. The specific anti-avoidance provisions are found in Section 22B of the Income Tax Act (58/1962), which takes aim at shares held as trading stock, and Paragraph 43A to the Eighth Schedule to the act, which applies if the shares are held on capital account.
These provisions generally find application when corporates structure the disposal of qualifying interests with the desire to receive an income tax exempt dividend as opposed to taxable income or capital gains. In order to generate the income tax exempt dividend, these disposals are generally structured as share buy-back transactions or dividend distributions combined with the immediate disposal of the shares.
If the exempt dividends qualify as extraordinary dividends, these dividends are reclassified as income subject to income tax at a rate of 28% or proceeds resulting in a capital gain subject to income tax at an effective rate of 22.4%.
These specific anti-avoidance provisions find application only if the corporates dispose of the shares in respect of which the extraordinary dividends are received within 18 months of receiving such dividends.
It appears that taxpayers have identified the disposal requirement as a structuring opportunity and devised schemes under which the shares are retained for at least 18 months before the shares are disposed of for a nominal consideration.
Therefore, the structures comprise a company declaring a substantial dividend, presumably equal to the value of the ordinary shares, followed by a share subscription under which a new investor subscribes for shares in the company. At the time of the subscription, the company will have a nominal equity value which enables the new investor to acquire essentially 99.99% of the ordinary shares in issue through the subscription transaction while diluting the exiting shareholder. The exiting shareholder will retain its 0.01% interest for at least 18 months before disposing of the shares for a nominal consideration.
These types of abusive scheme came to the attention of the National Treasury and it was proposed that the share buy-backs and dividend stripping rules be amended with effect from 20 February 2019.
The minister provided no guidance on the nature of the amendments, but taxpayers should expect a complicated provision that might have several unintended consequences.
For further information on this topic please contact Dries Hoek at Cliffe Dekker Hofmeyr by telephone (+27 115 621 000) or by email (email@example.com). The Cliffe Dekker Hofmeyr website can be accessed at www.cliffedekkerhofmeyr.com.
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