Issuing shares in exchange for a negotiable instrument or for future services - the tax dimension

• Jurisdiction: South Africa
• Author: Des Kruger,Brian Dickinson
• DOI: 10.10520/EJC174303
• Published date: 01 September 2012
• Date: 01 September 2012
• Pages: 22-30
• Published By: Siber Ink

22 © Siber ink

Issuing Shares in Exchange

for a Negotiable Instrument

or for Future Services

THE TAX DIMENSION

DES KRUGER1 • Brian DicKinson2

ABSTRACT

Prior to the introduction of the Companies Act of 2008 (‘the Act’), shares had

to be fully paid up before they could be issued. Thus, it was not possible to

acquire shares on credit or for the performance of future services. However,

with the implementation of the Act it is now possible for a company to issue

shares where the consideration for the shares is in the form of an instrument

such that the value of the instrument will only be realised at a later date,

or in the form of an agreement for future services, future benefits or future

payment by the subscribing party. While the company is required to immedi-

ately issue shares in these circumstances, the shares are, however, required to

be transferred to a third party to be held in trust for later transfer thereof to

the subscribing party in accordance with a trust agreement.

While the Act is clear as to the treatment of the voting and appraisal rights

attaching to the shares that are held in trust (they may not be exercised

as long as the shares are held in trust), the treatment of pre-emptive rights

associated with the shares and dividend distributions is not as clear. While

the Act prescribes that the pre-emptive rights may only be exercised, and

dividend distributions must be paid to or credited to the subscribing party,

to the extent that the instrument is negotiable or the subscribing party has

fulfilled its obligations under the agreement (‘the default position’), it is silent

as regards the position where the instrument is not yet negotiable or the

subscribing party has not yet fulfilled its obligations under the agreement. In

addition, the default position is subject to the terms of the trust agreement,

as the default position applies ‘except to the extent that a trust agreement …

provides otherwise’. It follows that the default position may be overridden by

the trust agreement.

The treatment of dividend distributions made in respect of shares held in

trust in these circumstances gives rise to dividends tax implications, and it is

these implications that are discussed in this article.

Introduction

While the Companies Act 71 of 2008 (‘the Act’) generally provides that

shares may be issued only when the full ‘adequate consideration’ for the

1

Director, Business Tax Advisory, Ernst & Young.

2

Manager, Business Tax Advisory, Ernst & Young.