South Africa: Re-characterisation of tax exempt dividends as taxable income
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

South Africa: Re-characterisation of tax exempt dividends as taxable income

dachs.jpg

Peter Dachs, ENS Taxand

The Taxation Laws Amendment Bill 2012 is expected to be promulgated this year. Various changes are proposed to, among others, section 8E of the Income Tax Act, which deems tax-exempt dividends on certain shares and, in particular, preference shares to be taxable income in the hands of the shareholder. To avoid the re-characterisation of dividends as income in the hands of the shareholder it is important:

  • that there is no obligation on the issuer of the shares to redeem the shares within three years; and

  • that there is no option of the shareholder to redeem the shares within three years.

It is also necessary to ensure that the shares are not secured by a financial instrument and are also not subject to an arrangement in terms of which a financial instrument may not be disposed of by the issuer. It should therefore be ensured that there is no negative pledge in relation to any financial instrument held by the issuer.

Even if the relevant triggers are met, the dividends will still not be re-characterised as taxable income provided the shares are issued by the issuer for the purpose of acquiring equity shares in an operating company.

In terms of the new section 8EA, any dividend received by or accrued to a person during any year of assessment in respect of a share must be deemed in relation to that person to be an amount of income (and not a tax exempt dividend) if that share constitutes a "third-party backed share" at any time during that year of assessment.

A "third-party backed share" is defined in section 8EA(1) as any share in respect of which an enforcement right is exercisable or an enforcement obligation is enforceable as a result of any amount of any specified dividend or return of capital attributable to that share not being received by or accruing to the person holding the share.

An "enforcement obligation" is defined in section 8EA(1) as, in relation to a share, any obligation, whether fixed or contingent, of any person other than the issuer of the share to:

(i) acquire the share from the holder of that share;

(ii) make any payment in respect of that share in terms of a guarantee, indemnity or similar arrangement; or

(iii) procure, facilitate or assist with any acquisition or the making of any payment contemplated in (i) or (ii) above.

An "enforcement right" has similar wording to the concept of an "enforcement obligation".

In terms of the proviso to the definition of a "third-party backed share", where the purpose of the issuer in issuing the preference shares is to acquire equity shares in an operating company, then the re-characterisation of dividends as taxable income does not take place. This is provided that the enforcement right or enforcement obligation may be exercised against any company that forms part of the same group of companies as the issuer and operating company respectively.

It can therefore be seen that there are fairly complex rules relating to the re-characterisation of tax exempt dividend income to taxable income in respect of certain shares. These rules apply in respect of existing shares and therefore it should be ensured that, at the relevant effective dates, the above-mentioned triggers are not in place in respect of all such shares.

Peter Dachs (pdachs@ens.co.za)

ENS Taxand

Tel: +27 21 410 2500

Fax: +27 21 410 2555

Website: www.ens.co.za

Return to the BRICS tax cooperation special focus

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article