|
Anne
Bennett |
Distributions made out of 'contributed tax capital' (CTC), a
notional concept that exists only for tax purposes, do not
attract South Africa dividends tax. CTC is determined
separately in relation to each class of share and equals the
consideration received for the issue of such shares, reduced by
CTC repayments made by the company on or after January 1
2011.
Any distribution made will automatically qualify for tax
purposes as a dividend, subject to dividends tax (irrespective
of the accounting treatment), unless the company's directors
elect to treat it as a repayment of CTC, in which case the
distribution will qualify as a tax-free 'return of
capital'.
The proposed amendment targets two structures that result in
the creation of CTC and hence increase a company's ability to
make tax-free distributions. The first involves a non-resident
entity disposing of its shares in a local subsidiary (SA SubCo)
to a newly interposed South African company (SA HoldCo) in
exchange for the issue of new shares. The second structure
involves a non-resident subscribing in cash for shares in a
resident company (SA HoldCo) whereafter SA HoldCo applies the
subscription proceeds to purchase shares in another company
that is part of the same group of companies as the non-resident
subscriber and SA Holdco. The percentage threshold for a group
of companies in this provision is reduced to 50% as opposed to
the normal 70% threshold.
In both these scenarios, it is proposed to limit the new CTC
created in SA Holdco to an amount equal to the CTC attaching to
the shares acquired by SA Holdco in the relevant
transaction.
This section is proposed to come into operation on July 19
2017 and, if enacted, will apply to any shares issued on or
after that date.
Most favoured nation
In a previous update, we discussed the binding ruling given
by SARS, confirming that a zero rate of dividends tax applies
to dividends distributed by South African companies to
qualifying Swedish tax resident shareholders because of the
most favoured nation provision (MFN) in the South Africa-Sweden
treaty.
The Dutch High Court has recently handed down a judgment
confirming that in its view, no dividends tax applies between
residents of South Africa and residents of the Netherlands
because of the MFN provision in the South Africa-Netherlands
treaty read together with the MFN provision in the South
Africa-Sweden treaty. Since South Africa has provided a zero
rate of dividends tax to Swedish residents under a treaty
concluded after the South Africa-Netherlands treaty, the MFN
provision in the latter treaty requires the same zero rate to
apply to distributions between South Africa and the
Netherlands. This is good news for those local taxpayers
currently seeking refunds from SARS of dividends tax previously
withheld on distributions to Dutch shareholders, based on the
legal arguments that have now been conclusively upheld in the
Netherlands. It will be interesting to see what impact the
Dutch case has on SARS, which has been contesting the refund
claims.
Anne Bennett (anne.bennett@webberwentzel.com)
Webber Wentzel
Tel: +27 11 5305886
Website: www.webberwentzel.com