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Shareholders' Loans Capitlisation to Equity
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2012/07/24 at 02:21:31 PM GMT
Posts: 7
Shareholders' Loans Capitlisation to Equity

Hi,

 

I am trying to establish the tax consequences of transferring a portion of a resident company's shareholder's loan to equity (share capital / share premium).

I have looked at the Eighth Schedule of the Income Tax Act but do not have clarity as to what tax implications will occur on this type of transfer. The basics of what is a disposal in terms of the Eighth Schedule (Paragraph 11) includes a sale, conversion, exchange, redemption etc.

Certain articles address shareholder's loans quoting that National Treasury may regard these loans as functioning almost as additional flexible share capital.

Any help would be greatly appreciated.

 

Regards

Guy Patron



 



2012/07/24 at 10:06:10 PM GMT
Posts: 56

Hi

The preamble of the word disposal - para 11(1) shows that it is to be construed very broadly - refer  SARS CGT Guide edition 4 page 66.

Anyway here is my offering for what it’s worth ,I would think that the proposed transaction would result in the  loan capital  being  extinguished(disposed of) resulting in a capital gain to the company and a capital loss to the shareholder.

Depending on the company’s financial position, I suppose Co. could pay a dividend to square loan account – no CGT implications but dividends tax would be triggered – less than CGT consequences for co. Alternatively loan account could be repaid via its cash resources resulting in both no CGT and dividends tax consequences.

However apart from the tax consequences, if the commercial and economic reasons outweigh the tax consequences, it would possibly make sense to go ahead with the envisaged transaction. .

I would also suggest that you familiarise yourself with Chapter 6 of SARS’ CGT Guide(pages 66 to 117).

Another option would be,is to consult a CGT Specialist.

 



2012/07/25 at 11:58:58 AM GMT
Posts: 7

Thank you for your thoughts and opinion.

 

I seem to be requested to look at potential tax issues on transactions that do not seem to be too clear cut in terms of the Act.

 

Kind regards

Guy

 



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