South African dividend stripping rules: Impact on liquidations and cross-border share buybacks

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

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

South African dividend stripping rules: Impact on liquidations and cross-border share buybacks

Sponsored by

sponsored-firms-ww.png
AdobeStock_35054468_Shares

Changes made last year to South Africa's dividend stripping rules have effectively eliminated the ability of group companies to make use of the rollover relief provisions that historically have allowed qualifying liquidations or deregistration of group companies (both local and foreign) to be done on a tax-neutral basis.

As things stand, certain otherwise-exempt dividends declared to qualifying shareholders will be classified as 'extraordinary dividends' and recharacterised as proceeds for capital gains tax purposes upon the disposal of the shares. An extraordinary dividend is a dividend exceeding 15% of the market value of the distributing company's shares either 18 months prior to the disposal/liquidation or as at the date of disposal/liquidation, whichever is the higher.

Following lobbying by taxpayers, the National Treasury has indicated that changes will be made to narrow the range of situations in which the dividend stripping rules will override the group rollover relief rules to "cases where the corporate re-organisation rules are abused by taxpayers". Certainty on what exactly is meant by this, and what the new rules will look like, will only be available towards the end of the year.

Where South African companies or controlled foreign companies (CFCs) in relation to South African companies have recently declared large dividends, taxpayers hoping to benefit from group relief provisions should therefore not dispose of the distributing companies until they are confident that group relief is in fact applicable. Planned eliminations of group companies are consequently on hold pending resolution of this problem.

The dividend stripping rules also have interesting consequences in circumstances where a South African company (SACo) holds shares in a foreign company (ForeignCo) and divests itself of its shareholding in ForeignCo by way of a buyback of its shares by ForeignCo.

If a South African company (or a CFC in relation to a South African company) sells shares in a foreign company, any gain made on the sale may be exempt if the seller has held a certain number of shares for a qualifying period and the buyer is an unrelated party which is tax resident outside South Africa. The purchase price must be market related. If any of these criteria are not met, capital gains tax (CGT) will apply.

A route which in the absence of the dividend stripping rules could have been followed to avoid CGT in all circumstances is the share buyback route. This involves a prospective purchaser first subscribing for an interest in ForeignCo, with ForeignCo then applying the proceeds of the subscription to buyback SACo's shares in ForeignCo. The prospective purchaser would then own 100% of the shares in ForeignCo. Ignoring the dividend stripping rules, any portion of the buyback consideration which was treated under the tax law in the foreign company's jurisdiction as a dividend would in these circumstances generally also be classified as a tax exempt foreign dividend in the hands of SACo. As a result of the dividend stripping rules referred to above, however, if SACo holds a so-called 'qualifying interest' in ForeignCo, 85% of the portion of the buyback consideration, which constitutes an exempt dividend in the hands of SACo, is likely to be taken into account for CGT purposes in the hands of SACo. Depending on the circumstances, however (and clearly subject to the application of substance-over-form and other general anti-avoidance rules), this could still be more beneficial than a direct sale in which the full proceeds would be taken into account for CGT purposes.

more across site & shared bottom lb ros

More from across our site

MAP cases keep increasing, and cases closed aren’t keeping pace with the number started, the OECD’s Sriram Govind also told an ITR summit
Nobody likes paperwork or paying money, but the assertion that legal accreditation doesn’t offer value to firms and clients alike is false
Ryan hopes the buyout will help it expand into Asia and the Middle East; in other news, three German finance ministers have called for a suspension of pillar two
SKAT, which was represented by Pinsent Masons, had accused Sanjay Shah and other defendants of fraudulent dividend tax refund claims
TP managers must be able to explain technical issues in simple terms, ITR’s European Transfer Pricing Forum heard
Prudential had challenged HMRC over VAT group relief; in other news, Donald Trump unveiled timber and wood tariffs, and the European Commission published a ViDA implementation strategy
Australia’s CbCR rules have ‘widespread support’ and do not put American companies at a competitive disadvantage, the FACT Coalition said
Baker McKenzie advised two of the member firms involved, while several advisers provided transaction counsel to US-based Grant Thornton Advisors
Foreign remittance requirements put additional administrative burden on Indian law firms and strain their relationship with foreign associate firms, according to practitioners
She will formally take over the leadership of the private client firm in July next year, succeeding the veteran Margaret Robertson
Gift this article