By Graham Viljoen and Donald Fisher-Jeffes of Webber Wentzel

In the 2017 Budget, delivered by the Minister of Finance, it was proposed that additional measures will be considered to circumvent transactions where investors choose to realise their share investments by means of having the shares they hold in a company bought back and characterised as a dividend, while being paid for by means of a new investor subscribing for shares in the same company. This followed on the back of a similar announcement in 2016, where after no 2 specific countermeasures were introduced. The primary concern throughout this period being the structuring in and perceived abuse of the local resident company-to-company dividend exemption to facilitate tax neutral disposals of investments, without incurring either dividends tax or capital gains tax.

Further to the above, concern has been raised that the local resident company-to-company dividend exemption additionally presents taxpayers with arbitrage opportunities through dividend stripping. The arbitrage is achieved through the declaration of extraordinary pre-sale dividends to a resident shareholder, which are exempt from tax. The effect thereof is to reduce the capital gains proceeds, which would otherwise have arisen upon disposal of the shares. Section 22B and paragraph 43A of the Eighth Schedule were previously introduced into the ITA to mitigate this behaviour and already deem a pre-sale dividend to be as an amount of income or proceeds. These sections are however subject to a number of limitations, which focus on the manner in which the pre-sale dividends were funded, and in many instances these limitations are ineffective or circumnavigated.

To mitigate the perceived abuse of share buyback schemes as well as the limitations of the dividend stripping rules, the DTLAB proposes that any dividends received within 18 months must be included in income; or included as proceeds for capital gains tax purposes, where a person disposes of shares in another company and that company held a ‘qualifying interest’ in that other company, with such qualifying interest being defined to mean a direct or indirect interest held by a company in another company, whether alone or together with any connected persons in relation to that company, that constitutes at least 50%of the equity shares or voting rights in that other company; or 20% of the equity shares or voting rights in that other company if no other person holds the majority of the equity shares or voting rights in that other company.

The amendments are currently very widely drafted and would appear to unintentionally deem a number of ordinary course transactions to be proceeds in the hands of the recipients. For example, the redemption of preference shares held by large shareholders and the distribution of in specie distributions, which would have already been subject to capital gains tax in the hands of the company. The deeming provisions also currently apply to shares and not only equity shares, as would be anticipated, which stretches its application far beyond the mischief which the legislation is intended to curb. The section is deemed to have come into operation on 19 July 2017, and applies in respect of any disposal on or after that date. While we anticipate the wide ambit of the amendments to be refined and narrow, it is not anticipated that the date of operation will be deferred.