It is customary that transactions would be concluded where a company would buy-back its own securities from an exiting shareholder. The aforesaid especially held substantial benefits when the exiting shareholder was also a company, in which case the proceeds from the transaction would be deemed as a dividend. In terms of the provisions of the Income Tax Act 58 of 1962 (“the Act”), resident companies are exempt from dividends tax when a dividend is declared to a shareholder company. The effect would be that the proceeds of such a share buy-back transaction would not subject to payment of the normal dividend tax, which is calculated at a rate of 20%.
However, during 2017 and in terms of the Draft Taxation Laws Amendment Bill (“Draft Amendment Bill”), the above matter was addressed thoroughly. In terms of the Draft Amendment Bill, the undermentioned provisions were added –
(2) Where a company disposes of shares in another company and that company held a qualifying interest in that other company at any time during the period of 18 months prior to that disposal, the amount of any exempt dividend received by or that accrued to that company in respect of the shares disposed of, must –
(a) to the extent that the exempt dividend is received by or accrues to that company –
(b) if that company immediately before that disposal held the shares disposed of as a capital asset (as defined in section 41),
must be accounted for in the year of assessment in which the disposal of shares take place or, when that dividend is received or accrues after that specific year of assessment, the effect thereof must be accounted for in the year of assessment in which that dividend is received or accrues, forming part of the proceeds from the disposal of shares, due to the share buy-back transaction.
As stated above, the effect of the amendments made in the Draft Amendment Bill is that should any buy-back of shares transaction, which occurs on or after 19 July 2017, falls within the scope of section 2, it would trigger the provisions relating to Capital Gains Tax (“CGT”), as provided for in the Act. It is therefore no longer possible for a company shareholder to sell its shareholding in a company, back to that company, and receive a tax-free dividend as was used so often prior to 19 July 2017.
In light of the abovementioned, it is paramount that a transaction of this nature is implemented with great care and consideration to ensure that all provisions as contained in the Draft Amendment Bill have been taken into account and provided for.