The South African Revenue Service (SARS) released Binding Private Ruling No 195 (Ruling) on 26 June 2015. The Ruling deals with the application of the exemption provision contained in s8(1)(a) of the Securities Transfer Tax Act, No 25 of 2007 (STT Act) in circumstances where parties have entered into an asset-for-share transaction as defined in s42 of the Income Tax Act, No 58 of 1962 (Act), but elected that any relief provided for in s42 of the Act should not apply. The Applicant, a company incorporated and resident in South Africa, was a wholly-owned subsidiary of HoldCo, a non-resident company incorporated in a foreign jurisdiction.
Category: Shares
Cross-issue of shares and tax-free corporate migrations
In the 2015 Budget, the Minister of Finance indicated that paragraph 11(2)(b) of the Eighth Schedule to the Income Tax Act, No 58 of 1962 (Act), which deals with the issue of shares by a company, would be reviewed. National Treasury has now released the first batch of proposals forming part of the draft Taxation Laws Amendment Bill 2015, which specifically addresses paragraph 11(2)(b). The issue of shares by a company (whether for cash, shares or other assets) generally does not constitute a disposal for capital gains tax purposes, although there may be capital gains tax consequences in terms of s24BA of the Act to the extent that there is a mismatch between the value of the shares issued and the cash or assets received.
Capitalisation of shareholder loans and set-off
The South African Revenue Service (SARS) published Binding Private Ruling 193 (Ruling) on 15 June 2015, which dealt with the partial capitalisation of a shareholder loan. The applicant was tax resident and incorporated in South Africa, and was held by a non-resident holding company. The holding company had previously extended a shareholder loan to the applicant, and at the time of the Ruling an amount of capital and interest remained outstanding.
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.
Binding Ruling – SARS ruling on preference share transaction
Binding Private Ruling No 191 (Ruling) was released by the South African Revenue Service (SARS) on 26 March 2015. The Ruling relates to the refinancing of debt through means of preference share funding. Having regard to the terms and conditions of the preference shares and the proposed cash-flows of the transaction, the applicant sought a ruling confirming that: the preference shares to be issued would not constitute ‘hybrid-equity instruments’ and ‘third-party backed shares’, as respectively defined in s8E(1) and s8EA(1) of the Income Tax Act, No 58 of 1962 (Act);
Which taxes apply to share loans?
Author: Magda Snyckers (Tax Director at ENSAfrica) 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.
Binding Ruling – SARS ruling on preference share transaction
Binding Private Ruling No 191 (Ruling) was released by the South African Revenue Service (SARS) on 26 March 2015. The Ruling relates to the refinancing of debt through means of preference share funding. Having regard to the terms and conditions of the preference shares and the proposed cash-flows of the transaction, the applicant sought a ruling confirming that: the preference shares to be issued would not constitute ‘hybrid-equity instruments’ and ‘third-party backed shares’, as respectively defined in s8E(1) and s8EA(1) of the Income Tax Act, No 58 of 1962 (Act);
Binding Private Ruling on a Notional Funding Arrangement: the Issue and Repurchase of Ordinary Shares
SARS 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.
SARS clamps down on share buy backs followed by the issue of shares
In practice taxpayers often enter into arrangements in terms of which a company buys back its own shares held by certain shareholders, and immediately thereafter issues new shares to new shareholders. This practice has long caused tax avoidance concerns for the South African Revenue Service (SARS), as it could circumvent the payment of capital gains tax (CGT) by the shareholder whose shares are bought back.
Taxation of shares – Beware when you issue shares
Generally there are no tax consequences when a company issues shares. This is the case regardless of whether the shares are issued for cash or in order to settle the purchase consideration that may have arisen pursuant to the acquisition of assets by the company. This follows from the provisions of paragraph 11(2)(b) of the Eighth Schedule to the Income Tax Act, No 58 of 1962 (Act) to the extent that there is no disposal of an asset by a company in respect of the issue of a share in the company.