Interest-free and low-interest shareholder loans

• Jurisdiction: South Africa
• Author: Liesl Kruger
• DOI: 10.10520/EJC173380
• Published date: 01 September 2014
• Date: 01 September 2014
• Pages: 21-30
• Published By: Siber Ink

21

© SIBER INK

Interest-free and

Low-interest Shareholder

Loans

LIESL KRUGER1

ABSTRACT

It is not unusual for companies to provide their shareholders with loans at

preferential rates of interest. Where these preferential rates are lower than

the prescribed ‘market-related interest’ rate, dividends-tax implications arise

where the relevant shareholder is a resident person who is not a company

and who is a connected person in relation to the company (a ‘qualifying

shareholder’). The loan must have been made by the company to the quali-

fying shareholder ‘by virtue of’ the shares held by such shareholder. Similar

dividends-tax implications arise where a company provides such a preferen-

tial loan to a resident person who is not a company and who is a connected

person in relation to the qualifying shareholder (a ‘connected qualifying

shareholder’). In effect, the company is treated as having paid a dividend

in specie to the relevant qualifying shareholder equal to the greater of the

prevailing ‘market-related interest’ in respect of the debt, less the amount of

interest payable to that company in respect of the relevant tax year, or nil. It

follows that, unlike secondary tax on companies (STC), the deemed dividend

under the dividends tax regime is not equal to the capital sum of the loan, but

a deemed yearly dividend that is determined with reference to the prevailing

‘market-related interest’ rate.

Where the affected preferential loan is granted to a qualifying shareholder

or connected qualifying shareholder subsequent to the introduction of the

dividends tax regime (1 April 2012), the only issue that should arise is whether

it can be said that the preferential loan was granted by the company to the

qualifying shareholder ‘by virtue of’ any shares held by the qualifying share-

holder in the company. The article considers a number of judicial pronounce-

ments as to the meaning of this phrase, and concludes that there has to be

a direct causal relationship between the holding of the relevant shares and

the advance of the loan in question in order for a deemed dividend to arise

in these circumstances.

The article then explores the dividends-tax implications that arise where

preferential loans were granted to qualifying shareholders or connected quali-

fying shareholders prior to the introduction of the dividends tax regime, but

remain outstanding subsequent to the introduction of dividends tax. It may

be that, at the time that the loan was granted, the loan arrangement trig-

gered a liability for STC, or that, while the loan arrangement triggered a

liability for STC, an exemption applied.

The article notes that, where a preferential loan was granted by a company

to a qualifying shareholder prior to the introduction of the dividends-tax

1

Off-site Consultant, ENSafrica.