Beware of tax on dividend stripping and manipulation of dividend rights

Author: Ben Strauss. Dividends paid by local companies are generally exempt from income tax in the hands of shareholders and, in certain cases, are either exempt from dividends tax or subject to a reduced rate of dividends tax. Taxpayers may be tempted to enter into transactions where they either do “dividend stripping”, or manipulate the right to receive dividends to avoid income tax, capital gains tax (CGT) or dividends tax.

Buying back shares from shareholders: dividends tax liability

Many issues arise when a company enters into an agreement to buy-back shares from its shareholders.  If a company enters into an agreement with a particular shareholder to buy-back a certain number of ordinary shares, whereby the shares will be returned and cancelled on the effective date of the agreement, but the payment for the buy-back will be made in instalments over several years. This raises the issue of when liability to pay dividends tax will arise? Section 1 of the Income Tax Act No. 58 of 1962 (the “Act”) defines a “dividend” as inter alia: “Any amount transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied…as consideration for the acquisition of any share in that company…”

Which taxes apply to share loans?

The ability to enter into loans over listed shares is an important part of the financial industry as it offers sellers of listed shares the ability to comply with their obligations to deliver shares under a short sale contract. This ability could ensure that the sale of listed shares do not result in failed trades, provided the relevant shares can be sourced and borrowed prior to the seller having to deliver the shares. The intended change by the JSE limited to move to from a T+ 5 to a T + 3 settlement date in order to align with its settlement period with the international norm, reinforces the importance of the share lending industry. As a result of the shorter settlement period, the ability to borrow shares to settle trades will be paramount to ensure as little failed trades as possible.

Deemed loans under transfer pricing seen as a dividend declared on 1 January 2015

South African taxpayers who made a transfer pricing adjustment in previous years of assessment will be required to pay dividend tax at the end of 28 February 2015. Under the old transfer pricing rules, a primary transfer pricing adjustment triggered a secondary adjustment in terms of a deemed loan in the hands of the relevant South African taxpayer; i.e. the amount “over paid” or “under charged” to the relevant non-resident connected person was deemed to be a loan to that foreign-connected person, on which arm’s length interest was deemed to have accrued to the South African resident. The new section 31 of the Income Tax Act, applicable from 1 January 2015, now provides that the deemed loan plus accrued interest – to the extent that these items were not “re-paid” by the non-resident before 1 January 2015 – must be deemed to be a dividend in specie that was declared and paid by … Continue reading

Expiry of STC credits on 31 March 2015

Dividends tax was introduced into the South African tax regime on 1 April 2012 and effectively replaced secondary tax on companies (STC). STC was levied on dividends distributed by companies at the flat rate of 10%. In terms of the dividends tax regime, a 15% tax is levied on the amount of any dividend paid by a company. The company is liable to withhold the amount of the tax in respect of cash dividends and pay it over to the South African Revenue Service (SARS).

Dividend payments to Holland – did you spot the aperture?

Author: Stephan Spamer and Howmera Parak – ENSafrica By now it is accepted that the payment of dividends to non-South African shareholders are subject to dividends tax which is levied at a rate of 15%, unless such rate is reduced by an applicable double tax agreement (DTA).  To this end, most DTAs are drafted in such a manner that the rate of dividends tax is reduced to 10% or 5%, depending on the percentage of shares the beneficial owner holds in the South African company.

Interest-free shareholder loans

Author:Liesl Kruger – Tax Consultant – ENSafrica Loans between companies and their shareholders, or other group companies are a common method of providing finance in the South African corporate environment. Loans of this nature may, however, give rise to tax implications in the hands of the lender or the recipient, and careful consideration should therefore be given to these transactions.

Everything you need to know about STC credits

Author: Mike Dingley (Mazars) Dividends Tax has been payable since 1 April 2012. Prior to this, resident companies that declared dividends were subject to Secondary Tax on Companies (‘STC’). Under the Dividends Tax regime when a company pays a dividend, it is, subject to certain requirements, allowed to deduct unused STC credits from the dividend amount in calculating the amount subject to Dividends Tax. Some changes are in the pipeline though, but for those who need a better understanding, here are some points to note. 

Transfer pricing – changes to secondary adjustments

By Christel du Preez, Senior Tax Manager Grant Thornton Johannesburg The proposed amendment The Draft Taxation Laws Amendment Bill 2014 proposes a revision of transfer pricing compliance in in the form of a deemed dividend, from 1 January 2015. It proposes that in future, the Section 31 secondary adjustment be deemed a dividend in specie, to be paid by the South African taxpayer to its foreign connected person.

The tinderbox of asset-for-share transactions

Author: Andrea Minnaar – Tax Director at ENSafrica The Income Tax Act No. 58 of 1962 (“the Act”) contains a number of provisions in terms of which assets may be transferred from one taxpayer to another on a tax-free basis, with the tax in relation to such an asset being deferred until the transferee eventually disposes of the asset. One such provision is contained in section 42, dealing with “asset-for-share transactions”.