‘Foreign dividend’ and ‘foreign return of capital’ : a home-grown solution to their proper interpretation in section 1 of the Income Tax Act

• Jurisdiction: South Africa
• Author: Milton Seligson
• DOI: 10.10520/EJC-e315dba29
• Published date: 01 March 2018
• Date: 01 March 2018
• Record Number: btclq_v9_n1_a2
• Pages: 1-8
• Published By: Siber Ink

1

© Siber ink

‘Foreign Dividend’ and

‘Foreign Return of Capital’:

A HOME-GROWN SOLUTION TO THEIR PROPER

INTERPRETATION IN SECTION 1 OF THE

INCOME TAX ACT

MILTON SELIGSON SC

AbstrAct

This article deals with the application of the definitions of ‘foreign dividend’

and ‘foreign return of capital’ in section 1(1) of the Income Tax Act 58 of

1962 (‘the ITA’). The definitions are considered in the context of the following

factual scenario: a United Kingdom (‘UK’) holding company (‘HoldCo’)

unbundles the shares in its UK subsidiary to the shareholders of HoldCo, of

whom a number are South African resident taxpayers who are subject to the

provisions of the ITA.

The article considers the question whether the foreign shares distributed in

specie will, for purposes of the ITA, constitute a foreign dividend or a foreign

return of capital as defined, or be treated as something else such as gross

income or capital received by the South African shareholders. This issue is

likely to become increasingly important in an era when South African invest-

ments in foreign stock markets are growing, and the correct tax treatment

of foreign distributions to South African shareholders arises for consideration.

The meaning and scope of the definitions are first considered, followed by

the meaning of the term ‘distribution’ which, while not defined in the ITA, is

clearly defined in the Companies Act 71 of 2008, and has a well-established

meaning in South African law, where it includes dividends and all other forms

of payment by a company to its shareholders. The author submits that the

term ‘distribution’, when used in the ITA, should be construed in harmony

with such meaning.

The article then deals with the question whether the concepts used in

the definitions must be interpreted from a South African perspective, given

that the definitions require reference to the laws that govern tax on income

on companies of the country in which the foreign company has its place

of effective management, in order to determine whether the distribution

is a dividend or similar payment, or a distribution or similar payment other

than a foreign dividend. The article provides cogent reasons why the key

concepts used should nevertheless be given a meaning that is consistent with

the accepted South African understanding of those terms, when determining

how the tax laws of the foreign jurisdiction treat the distribution in question.

The concluding section of the article summarises the author’s contentions

and reiterates the thesis that the South African law meaning of the concepts

used in the definition should prevail when applying the definitions to the tax

treatment of the relevant distribution in the foreign country concerned.