Anti-dividend stripping tax avoidance rules: You may need to revisit your 2019 transactions
On 21 July 2019, the Draft Taxation Law Amendment Bill was released, and introduced as the Taxation Law Amendment Bill, 2019 (herein the ”TLAB”) in the National Assembly by the Minister of Finance on 30 October 2019, following public comments.
By way of example, the anti-dividend stripping provisions would apply where:
- Company X is a shareholder in Company Y (the ”Target Company”); and
- Company X holds a ‘qualifying interest’ in the Target Company during an 18-month period prior to a disposal of its shares; and
- The Target Company declared an ‘extraordinary dividend’, exempted from dividend tax, either as part of the disposal transaction or within 18 months prior to the disposal of the shares by Company X; and
- Following which Company ‘X’ disposes of all its shares in the Target Company.
A qualifying interest is defined as either a 50% equity shareholding and / or voting rights (at least), owned by a company shareholder in the target company; or if no person holds at least 50% of the equity shares and / or voting rights in the Target Company, then at least 20% of the equity shares and / or voting rights if no-one else holds a majority in the Target Company. In the example above, the dividend (which would have been treated as an exempted dividend) would either have to be included in the income of Company X, or in its proceeds for capital gains tax (CGT) purposes.
The TLAB expands on the scope of the anti-dividend stripping rules in the Income Tax Act, Act 58 of 1962 (herein the ”ITA”) in order to clamp down on certain abusive arrangements. The ‘abusive arrangements’ referred to, were aimed to circumvent the dividend stripping rules and involved a transaction where the Target Company distributes a substantial dividend to a company shareholder, followed by the issue of shares to a third party, resulting in the dilution of the company shareholder’ equity rights. In effect, this is a disguised ‘sale of shares’, and could be achieved in terms of the previous anti-dividend stripping provisions. Previously, the current company shareholder must have disposed of its shares in the ‘target company’ for the dividend stripping rules to be triggered (refer our example above).
According to the TLAB and the expanded dividend stripping rules, a company shareholder will now be ‘deemed to have disposed of shares’ if (with reference to our example above):
- The Target Company issues shares (hereinafter referred to as the ‘new shares’) to a third party; and
- the effective interest of Company X in the equity shares of the Target Company is reduced/diluted by reason of the new shares issued; and
- Company X will be deemed to have disposed, immediately after the new shares were issued, of a percentage of its equity shares, equal to the percentage by which the effective interest of Company X in the equity shares of the Target Company has been diluted / reduced.
The TLAB does not particularly consider the intention of the taxpayer, and therefore the risk that the expanded dividend stripping rules could also apply to a transaction where there is no intent to obtain a tax benefit.
Because these provisions will apply with effect from 20 February 2019, it is recommended that great caution should be applied and tax advice should be sought in respect of scenarios where a company will declare or already declared substantial dividends in an 18-month period prior to a share issue. Contact our firm to assist with a risk assessment and to consider key alternatives to your proposed and anticipated transactions.
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE)