Dividends Tax
1807. New dividend dispensation
January 2010 - Issue 125
Introduction
In anticipation of the switch from secondary tax on companies (STC) to dividends tax (a withholding tax) in the latter part of 2010 (which might or might not happen then), a new definition of "dividend" and "contributed tax capital", as well as the new dividends tax rules, were enacted in 2008.
In 2009 certain technical amendments were made to these rules. Before dealing with the more important amendments, it is worthwhile summarising the provisions of the dividends tax:
· It is a withholding tax at the rate of 10%, which must be withheld by the company declaring the dividend.
· The rate may be reduced under an appropriate double tax agreement.
There are various exemptions from the tax, the most common being where the shareholder is another South African-resident company or a tax-exempt institution, such as a public benefit organisation or a pension fund. Any shareholder entitled to an exemption or reduction from the tax must provide a prescribed written document to the company for this purpose (though companies forming part of the same group are automatically exempt).
In the case of listed companies, the claim for exemption or reduction would be made with the Central Securities Depository Participant (CSDP) or other regulated intermediary (as defined).
Amendment to definition of "dividend"
The major amendment relates to a share buy-back by a company listed on the JSE. Since companies were first allowed to buy back their own shares in 1999, the purchase price, to the extent it was funded out of reserves, has been deemed to be a dividend for tax purposes, and therefore subject to STC. As a consequence, the selling shareholder would not be liable for CGT in respect of that portion of the price comprising the deemed dividend.
While such an approach could easily be dealt with in the case of an unlisted company, it was always problematic when a listed company purchased its own shares in the market, because the seller would often have been unaware that the company was the purchaser. As a result, the company would have paid STC and the seller would also have paid CGT.
The "dividend" definition now states that a transfer to a shareholder effectively out of reserves will not be a dividend if it constitutes an acquisition by the company of its own securities as contemplated in the JSE’s Listing Requirements. This will ensure that only the seller pays CGT. It also means that no withholding tax will be payable.
Foreign dividends
Currently dividends declared by foreign-resident companies whose shares are listed on both the JSE and a foreign exchange are exempt from tax. An amendment now provides that the exemption will apply as long as the share is listed on the JSE, that is irrespective of whether or not it is also listed on a foreign exchange. While this might appear to be a concession, in that the exemption is now extended also to companies which have a so-called inward listing and whose sole listing is on the JSE (as opposed to companies with multiple listings), an amendment to the dividends tax rules now provides that the 10% dividends tax will be payable by those foreign companies on dividends declared by them in respect of shares which are listed on the JSE. (To the extent that there is also a foreign withholding tax payable in respect of those dividends, the South African dividends tax will be reduced by the amount of the foreign withholding tax. Thus, for example, if the foreign withholding tax is 5%, the South African dividends tax will only be a further 5%; or if the foreign withholding tax is 15%, there will be no South African tax payable at all.)
The second amendment to the foreign dividends exemption relates to the removal of the exemption that applies where a foreign dividend is distributed out of profits that were taxed in South Africa, or which arose directly or indirectly from dividends declared by a South African-resident company.
Presale dividends
It has become practice from time to time, both in South Africa and internationally, to attempt to reduce capital gains tax (CGT) on the sale of shares by reducing the value (and sale price) of the shares, by the company declaring a dividend shortly before the sale. This has the effect of extracting value from the company. This dividend might not be subject to STC, for example, if the dividend is declared to another group company; or if it is subject to STC, this would still be cheaper than the CGT otherwise payable by a shareholder which is a company or a trust (14% and 20% respectively).
To counter this practice, a new paragraph 43A has been inserted into the Eighth Schedule to the Act, which essentially requires the seller of the share to add to the proceeds on sale of the shares, the amount of the pre-sale dividend. However, it is not every dividend that falls within these rules, and the following will be the circumstances where the paragraph applies:
· The shareholder is a company resident in South Africa.
· The dividend must be received within a period of eighteen months prior to or as part of the disposal.
· The shares were held as capital assets and the shareholder holds more than 50% of the equity of the company being sold.
· Within 18 months prior to the disposal, the company declaring a dividend (or any other company in which that company directly or indirectly holds more than 50% of the equity) has obtained a loan or advance from, or incurred any debt owing to, a person who is acquiring the shares, or is a connected person (as defined) in relation to the acquirer, or the loan, etc is guaranteed or otherwise secured by the acquirer or connected person.
It is therefore clear that the circumstances in which the new provision will apply are very limited. The Explanatory Memorandum to the Bill indicates that the provision goes much further. For example, it would include a situation where the acquirer subscribes for new shares in the company being sold, and the company uses the cash to declare a dividend to the selling shareholder. But it is clear that the actual legislation does not go this far (possibly the draft legislation originally stated this and was amended without the Explanatory Memorandum being amended; or the latter was drafted in anticipation of an amendment to the Bill which never took place). Strangely, the provision does not seem to attack the simple mechanism of achieving the avoidance by the company declaring a dividend and leaving the dividend owing on a loan account in favour of the seller, followed by the seller selling both the shares and loan (such a provision was in an earlier draft of the legislation but has not found its way into the final version).
An almost identical section 22B has been introduced into the Act, which deals with the situation where the shares are held as trading stock and not as capital assets.
Werksmans Inc.
IT Act:S 1 definition of ‘contributed tax capital’, definition of ‘dividend’, definition of ‘foreign dividend’
IT Act:S 22B
IT Act:8th Schedule para 43A
