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.

the draft reviewed Mining Charter: Employee share ownership plans and the ownership element – playing the waiting game?

One of the key elements addressed in the Draft Reviewed Broad Based Black-Economic Empowerment (“BBBEE”) Charter for the South African Mining and Minerals Industry, 2016 (the “draft reviewed Mining Charter”) is the issue of ownership. The Department of Mineral Resources (“DMR”) seeks to achieve the ownership requirement through broad-based employee share option plans (“ESOPs”), which are likely to have an impact on both mining companies and their employees from a tax perspective. The DMR published the draft reviewed Mining Charter in April, following an assessment of compliance by mining companies with the Amended Mining Charter of 2010. According to the preamble of the draft reviewed Mining Charter, this assessment revealed the following regarding the ownership element of the Mining Charter:

SARS rules again on the capitalisation of loan accounts

Author: Ben Strauss (Director at Cliffe Dekker Hofmeyr). The South African Revenue Service (SARS) has now issued a number of rulings on the matter of the “conversion” of debt to equity. We have discussed previous rulings on this topic in our Tax Alerts of 15 January 2016 and 9 October 2015. On 31 May 2016 SARS issued Binding Private Ruling 236 (Ruling) which again deals with the issue.

SARS ruling on a share subscription transaction followed by a share

Author: Mansoor Parker (Tax Executive at ENSAfrica). On 17 March 2016, the South African Revenue Service (“SARS”) issued an interesting binding private ruling (“BPR 227”) concerning a share subscription transaction which was followed by two share buyback transactions. BPR 227 deals with an area that National Treasury and SARS have identified as a problem, namely where a shareholder disposes of its shares through means of a share buyback as opposed to selling the shares outright to a third party. Before dealing with BPR 227 we will explain the background to this issue, the steps taken by National Treasury and SARS to deal with this issue and why BPR 227 was treated differently.

When are funds used for a ‘qualifying purpose’? a ruling regarding s8EA in the context of a BEE transaction

On 13 April 2016, the South African Revenue Service (SARS) issued Binding Private Ruling 228 (Ruling), which dealt with s8EA of the Income Tax Act, No 58 of 1962 (Act). Section 8EA is an anti-avoidance provision, which treats the yield on third-party backed shares as income instead of dividends in the hands of the holder.

Impact of tax on investment returns

Saving more and investing through a tax-free savings account is a very tax efficient way of ensuring maximum after-tax returns for your hard earned money, according to Francis Marais, research and investment analyst at Glacier by Sanlam. “Fortunately, in South Africa, we have a few tools to help with achieving maximum tax efficiency. Some are explicit tax savings vehicles, while some are less explicit, but worth keeping in mind,” said Marais.

South African budget takes aim at hybrid debt instruments, share buybacks

Author: Peter Dachs (MNE Tax). South Africa’s Minister of Finance has announced tax changes affecting business in the 2016 budget, including a measure to curb perceived abuses associated with hybrid debt instruments and a warning about future action on share buybacks Under South African domestic law, hybrid debt instruments, i.e. debt instruments with certain equity features, result in the return thereon being treated as a tax-exempt dividend. The budget, issued February 24, states that with immediate effect in circumstances where a nonresident issuer obtains a tax deduction for a payment on a hybrid debt instrument, the South African taxpayer receiving the return will be taxable thereon.

Budget 2016 – The re-characterisation of proceeds in the case of a share buyback

It was announced as part of the Budget proposals that National Treasury may recharacterise the proceeds that are received by a shareholder that is a company in circumstances where it disposes of its shares through means of a share buyback as opposed to selling the shares outright to a third party. This conundrum is currently arising on a daily basis where a shareholder in a company has two ways in which to dispose of the shareholding in the company, being:

Budget 2016 – Share incentive schemes

Section 8C of the Income Tax Act acts as an anti-avoidance mechanism that prevents employees from treating what is essentially fully taxable salary or bonus income at reduced tax rates through the use of restricted shares and other incentive schemes. Essentially, s8C delays taxation in respect of the receipt or accrual until such time that the employee becomes entitled to the full value of the share or rights under the relevant scheme. Dividends received or accrued on the underlying shares are also generally not exempt under s10(1)(k) of the Income Tax Act unless the shares are equity shares as defined.

Shares incentive schemes – Innocuous binding private ruling or perhaps not

We often comment that the tax legislation applicable to share incentive schemes is complex and, as a result, a number of advance tax rulings have been published by the South African Revenue Service (SARS) dealing with the issues. Another Binding Private Ruling, No 199 (Ruling), was released by SARS this week which dealt with the questions of whether: the participation rights held by beneficiaries of a share incentive trust constituted “restricted equity instruments” for purposes of s8C(7) of the Income Tax Act, No 58 of 1962 (Act); and the dividends received by the beneficiaries by virtue of these participation rights will be tax as income or exempt from normal tax in terms of s10(1)(k)(i) of the Act.