Authors: Mareli Treurnicht and Emil Brincker. On 12 June 2019 the Cape Town Tax Court delivered its judgment in the dividends tax test case between ABC Pty Ltd (Taxpayer) and the South African Revenue Service (SARS). The case pertained to SARSs refusal to refund dividends tax overpaid by the Taxpayer following the Taxpayers interpretation of the most favoured nation provision (MFN clause) in the double taxation agreement (DTA) between South Africa (SA) and the Netherlands (SA/Netherlands DTA) (Dutch MFN clause), read with the MFN clause in the SA/Sweden DTA (Swedish MFN clause) and the SA/Kuwait DTA.
Category: Dividend Tax
Not all dividends are ordinary
Author: Michael Reifarth (Tax Executive at ENSAfrica). In the listed sector, shareholders may be presented with various elections to be made as regards the nature of distributions made by companies in which equity investments are held.
Accrual of amount on cession of right to dividends
Author: Ben Strauss (Tax Director at Cliffe Dekker Hofmeyr). Generally speaking, dividends paid by South African companies are exempt from income tax in the hands of shareholders. The dividends may, however, be subject to dividends tax, subject to certain exemptions.
Overlap in treatment of dividend
Author: Joon Chong, Partner in the Tax Practice at Webber Wentzel. Section 1 of the Income Tax Act (ITA) defines a “dividend” to be any amount transferred by a resident company for the benefit of any person in respect of any share in that company whether by way of a distribution or consideration for a share repurchase but does not exclude a reduction of contributed tax capital of the company. The section 31 transfer pricing rules in the ITA require transactions between resident and non-resident connected parties (affected transactions) to be carried out on an arm’s length basis. To the extent that this is not done, section 31(2) requires a taxpayer to calculate its taxable income to account for any adjustments necessary, as if any affected transaction has been entered into on an arm’s length basis. This is the primary adjustment to taxable income.
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 Read More …
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.