Binding Private Ruling on a Notional Funding Arrangement: the Issue and Repurchase of Ordinary Shares

income tax 1SARS issued the Binding Private Ruling 190 on 5 March 2015, which deals with the issue and repurchase of ordinary shares. The ruling deals with a proposed arrangement and the contractual rights and restrictions established separately from any class provisions applicable to those shares in terms of the Applicant Company’s memorandum of incorporation.

The parties to the ruling include the Applicant, which is a company incorporated in and a resident of South Africa; and the Co-Applicant which is a company incorporated in and a resident of South Africa.

The Applicant established two trusts which would become shareholders in the Co-Applicant for the purpose of the Co-Applicant acquiring ordinary shares in the Applicant. The two trusts subscribed for 51% and 49%, respectively, in the Co-Applicant’s issued share capital at nominal value which would result in the two trusts being and remaining the sole shareholders of the Co-Applicant. The Co-Applicant subscribed at a nominal value for ordinary shares in the Applicant which would, after issue, constitute 26% of its entire issued share capital.

The ordinary shares which the Co-Applicant subscribed to had exactly the same rights and privileges as the remainder of the ordinary shares issued by the Applicant. The parties contractually agreed (in a subscription and repurchase agreement) that:

  • The Applicant will, on the fifth anniversary of the subscription date (the repurchase date), repurchase a determinable number of ordinary shares held by the Co-Applicant at a nominal amount;
  • The Co-Applicant will not be entitled to dispose of the ordinary shares until after the repurchase date;
  • The ordinary shares shall be held by the Applicant in safe custody until the repurchase date; and
  • The number of ordinary shares to be repurchased by the Applicant will be determined in accordance with a pre-determined notional vendor funding formula which will take into consideration the following:
    • The initial market value of the ordinary shares in the Applicant not subject to the subscription and repurchase agreement;
    • The market value of the ordinary shares in the Applicant not subject to the subscription and repurchase agreement, on the repurchase date;
    • An escalation factor; and
    • The period of time that has elapsed since the subscription date to the repurchase date.

Subsequent to the future repurchase of the determined number of ordinary shares from the Co-Applicant, the remaining shares will be released from safe custody and their share certificates will be delivered to the Co-Applicant.

SARS considered section 24J of the Income Tax Act; paragraphs 11(1)(a) and 35 of the Eighth Schedule to the Income Tax Act, 1962 (the ITA); and section 1, definition of “transfer” of the Securities Transfer Tax Act and issued the following ruling:

  • Section 24J of the ITA will not apply to the proposed transaction;
  • There will be no “disposal” (as contemplated in paragraph 11) in respect of the remaining ordinary shares held by the Co-Applicant following the repurchase transaction;
  • The creation of the repurchase and restriction rights in terms of the subscription and repurchase agreement will not give rise to a capital gain or loss as contemplated in paragraphs 3 and 4 of the Eighth Schedule, for the Applicant or Co-Applicant;
  • The repurchase of a portion of the ordinary shares from the Co-Applicant by the Applicant at a nominal price will not give rise to a capital gain or loss for the Co-Applicant.
  • No securities transfer tax will be levied in respect of the remaining ordinary shares held by the Co-Applicant following the repurchase transaction.

The ruling is valid for a period of six years from 19 February 2015 and is not subject to any additional conditions and assumptions made by SARS.

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