Dividend stripping and equity funding : limitations and restrictions

• Published date: 01 September 2018
• DOI: 10.10520/EJC-1110ddd420
• Record Number: btclq_v9_n3_a3
• Author: Michael Rudnicki
• Pages: 14-21
• Date: 01 September 2018

14 © Siber ink

Dividend Stripping and Equity

Funding:

LIMITATIONS AND RESTRICTIONS

MICHAEL RUDNICKI

ABSTRACT

The anti-avoidance rules relating to dividend stripping and equity funding

continue to expand within our tax law. 2017 saw the expansion of our

dividend-stripping rules to cater for related-party dividend stripping and

consequential disposals and the introduction of legislation to curtail the abuse

of Contributed Tax Capital. This article explores the legislative innovations

introduced.

Share buy-backs are often used as a mechanism to dispose of shares

between willing buyers and willing sellers. A disposal of shares will typically

constitute a disposal for Capital Gains Tax purposes. In order to circumvent

this liability, the acquiring company capitalises the target company with an

equity injection and this company repurchases the shares owned by the selling

company. The repurchase will usually constitute a ‘dividend’ for tax purposes,

free of Dividend Withholding Tax, because of an exemption between two

South African resident companies.

An extraordinary dividend declared by a company to a company holding

a qualifying interest in the company will be deemed to constitute income,

as def‌ined, where the said shares disposed of constitute trading stock, and

proceeds where the shares are held as a capital asset and where the said

dividend is received or accrued within 18 months prior to the disposal of the

shares. ‘Extraordinary dividend’ is def‌ined as a dividend in respect of a prefer-

ence share which exceeds a rate of 15%, or any dividend received or accrued

within a period of 18 months prior to the disposal of shares which exceeds

15% of the market value of the shares at the beginning of the 18 month

period of the date of disposal or at the date of disposal.

Contributed Tax Capital (‘CTC’) constitutes tax-base share capital of a

company. A return of CTC typically does not constitute a dividend for tax

purposes and therefore is free of Dividend Withholding Tax. The intervention

of a South African intermediary company as a subsidiary of a foreign holding

company incorporated to create CTC has been curbed by the introduction of

section 8G of the Income Tax Ac 58 of 1962. The introduction of CTC in a new

(intermediary) South African subsidiary of a non-resident group company for

purposes of acquiring a majority interest in a South African target company

previously held by the non-resident company, will be limited to the CTC of

the target company.