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South Africa: Draft legislation proposes significant changes to the tax treatment of share buy-backs and dividend stripping

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Tax Bulletin

In the 2016 annual Budget Speech the Minister of Finance indicated the possibility of legislative countermeasures to curb the use of share buy-back arrangements that resulted in no tax being triggered. However, no such legislation was introduced in the 2016 year. Again in this year’s Budget Speech, the Minister proposed that “specific countermeasures be introduced to curb the use of share buyback schemes.” These measures have now been drafted and are set out in the draft Taxation Laws Amendment Bill, 2017 (the “Draft Bill”), which was published for public comment on 19 July 2017.

In the 2016 Budget Review it was stated that:

“One of the schemes used to avoid the tax consequences of share disposals involves the company buying back the shares from the seller and issuing new shares to the buyer. The seller receives payment in the form of dividends, which may be exempt from normal tax and dividends tax, and the amount paid by the buyer may qualify as contributed tax capital. Such a transaction is, in substance, a share sale that should be subject to tax. The wide-spread use of these arrangements merits a review to determine if additional countermeasures are required.”

The interaction of share buy-backs and the dividends tax regime entails more risk to the fiscus as tax planning using share buy-backs became more prevalent due to the fact that company to company dividends are exempt from dividends tax.

In order to curb the use of buy-back schemes, it has now been proposed in the Draft Bill that section 22B and paragraph 43A of the Income Tax Act be amended.

Under the Draft Bill, where a resident company disposes of shares in a company (which would include a buy-back) in which it holds (in the previous 18 months) at least 50% of the shares or voting rights, or at least 20% of the shares or voting rights if no other entity holds the majority of the shares or voting rights then any exempt dividend received or accrued within 18 months prior to the disposal or received or accrued by reason or in consequence of that disposal must be added to the disposing companies proceeds for capital gains tax purposes or its income where the disposal is on revenue account. The net result is that the disposing company is taxed on the buy-back.

The Draft Bill is open for public comment until 8 August 2017. If the Draft Bill is passed into law the proposed amendments will come into force with retroactive effect from 19 July 2017.


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