Share re-purchase and profit extraction transactions

The favourable tax treatment afforded to dividends in contrast to other forms of income (including capital gains subject to capital gains tax) in terms of South African tax law has resulted in many opportunities for tax arbitrage especially where one is dealing with the sale of shares. Given that dividends are generally exempt from tax in terms of the Income Tax Act No. 58 of 1962 (the ITA) and in certain instances (most notably payments by South African tax resident companies to other South African tax resident companies) exempt from dividends tax, many transactions have typically been structured to take advantage of the favourable dispensation afforded to dividends. A classic example would be for a corporate shareholder to exit its share investment in a company by means of a share repurchase transaction as opposed to the direct sale of shares. There are many commercial benefits of doing so but the Read More …

Amendments to the regulation of primary and secondary listings on the JSE

Authors: Colin du Toit,Madelein Burger,Elodie Maume from Webber Wentzel. ​On 5 November, the JSE Limited (JSE) announced amendments to its Listings Requirements to strengthen the regulation of primary listings and secondary listings. The amendments follow an extensive consultation process with the market and the public that kicked off in September 2018 after the JSE released a consultation paper (Paper) on “possible regulatory responses to recent events surrounding listed issuers and trading in their shares” (click hereto read the e-alert on the Paper).Following the consultations, the JSE published draft amendments in April 2019 for formal comment (clickherefor the e-alert on the draft amendments).

Unforeseen preference share amendments

Author: Brian Dennehy, Khurshid Fazel and Joon Chong, at Webber Wentzel. The 2019 Taxation Laws Amendment Bill (TLAB) was tabled with the Medium Term Budget Policy Statement on 30 October 2019. The TLAB contains a significant amendment to the definition of “hybrid equity instrument” in section8E of the Income Tax Act, which will deem any distributions made within 3 years of the date of issue of a preference share to be treated as normal income and fully taxable in the holder’s hands.

Preference share funding and the potential application of paragraph 43A of the Eighth Schedule of the Income Tax Act

Authors: Ludwig Smith and Julia Kaplan. In a preference share funding transaction, the funder subscribes for preference shares in the share capital of a company. In contrast to a loan where interest on a debt facility is taxable in the hands of the lender, the dividends received by the holder of the preference shares are generally exempt from income tax. This tax benefit is, in turn, advantageous to the company as the funder can charge the company a lower funding rate than would otherwise have been charged had the funding been advanced in the form of a loan.

Employee share schemes: Tax deductibility of employer contributions

Ben Strauss (Director at Cliffe Dekker Hofmeyr). Many employee share incentive schemes work as follows: The employer company forms a scheme trust. The company pays a non-refundable cash contribution (or grant) to the trust (instead of, say, lending cash to the trust). The trust uses the cash to buy, or subscribe for, shares in the employer company or another related company. Eligible employees are given the opportunity to participate in the scheme by, say, acquiring units in the trust, subject to the employees continuing to comply with certain conditions over a number of years.

Hybrid Equity Instruments: Redemption versus repurchase

Author: Leani Nortje, a Senior Associate at Webber Wentzel. Section 8E of the Income Tax Act, 1962 (the Act) applies to inter alia deem a share to be a hybrid equity instrument if certain requirements are met, with the result that otherwise exempt dividends paid in respect of that share are deemed to be fully taxable income.   One of the requirements that must be met for purposes of section 8E to apply is that the issuer of the share must be obliged to redeem the share in whole or in part, or the share may at the option of the holder be redeemed in whole or in part, within three years from the date of issue of the share. Section 8E therefore requires a “redemption” of the relevant shares.

Major new tax burden introduced

Author: David Warneke (Partner and head of Tax Technical at BDO South Africa). The Taxation Laws Amendment Act of 2017 (Act 17 of 2017) which was promulgated on 18 December 2017 contains provisions, namely section 22B of the principal Income Tax Act and paragraph 43A of the Eighth Schedule to the Income Tax Act, that will result in a significant compliance burden for companies, even in cases in which they do not result in additional taxation. The provisions deal with disposals of shares in a company (say A) that are held by another company (say B) in circumstances in which B held a significant portion of the equity shares (which the Amendment Act defines as a qualifying interest) in A at any time within the 18 months preceding the disposal. Section 22B applies in situations in which the shares that are the subject of the provision are held as trading Read More …

Consecutive asset-for-share transactions

Author: Ben Strauss (Director at Cliffe Dekker Hofmeyr). Section 42 of the Income Tax Act, No 58 of 1962 (Act) allows taxpayers to transfer assets to a company free of immediate tax consequences, provided certain requirements are met; there is a roll-over for tax purposes. However, certain anti-avoidance provisions may be triggered if the company that acquired the assets, disposes of the assets within 18 months of acquisition.

The death of share buy-backs?

Author: Emil Brincker (National Practice Head at Cliffe Dekker Hofmeyr). Share buy-backs have become very popular over the last few years in circumstances where a taxpayer intended to dispose of his shareholding in a company. Share buy-backs have become very popular over the last few years in circumstances where a taxpayer intended to dispose of his shareholding in a company. This was especially the case to the extent that the seller is also a company. The reason is that, should one consider the definition of a dividend in s1 of the Income Tax Act, No 58 of 1962 (Act), the proceeds from a share buy-back will be deemed to be a dividend to the extent that it is not funded out of so-called share capital or contributed tax capital (CTC). To the extent that the seller is a company, such dividend would also not be subject to dividends tax at Read More …