Dividends withholding tax implications where a resident company is beneficiary of share scheme trust
11 April 2013
Posted by: Author: Noxolo Ntombela
Source: Noxolo Ntombela
Dividends withholding tax ("DWT”) was introduced into the Income Tax Act 58 of 1962 ("the Act”) with effect from 1 April 2012. Section 64F of the Act exempts the withholding of DWT in respect of the receipt of dividends, to the extent that it does not consist of dividends in specie by "beneficial owners” which are listed in the section. A resident company is included in the exemption in terms of the list in section 64F(a) .
We are all aware that uncertainty can arise in the determination of who the beneficial owner is in cases where a trust is the recipient of a dividend. It is trite law that the beneficiaries of a vested trust are the beneficial owners as the dividend paid would accrue to them in terms of section 25B of the Act. The trust would merely act as a conduit for the income. However, in the case of a discretionary trust this is not certain as the trustees may not have exercised their discretion to vest the right to the income in the beneficiaries.
The South African Revenue Service ("SARS”) recently issued a Binding Private Ruling ("BPR 129”) dealing with the exemption from dividends tax of dividends received by a listed resident company, as a result of being the beneficial owner of the thereof, that were paid in respect of the company’s own shares. Section 64D of the Act defines "beneficial owner” as the person entitled to the benefit of the dividend attaching to a share.
The facts of BPR 129 are essentially that the Applicant Company had five share incentive schemes for its different categories of employees. The terms of each scheme were embodied in a trust deed that established a separate Share Trust. A set of scheme rules governed the operation of each particular share incentive scheme trust.
Each Share Trust regularly held shares that were not allocated to any staff beneficiary, either because a beneficiary left the Applicant Company’s employ in circumstances that required the Share Trust to repurchase the shares, or because a beneficiary of the Share Trust failed to exercise their share options, or because shares were acquired by a Share Trust and the trustees of that trust have not yet allocated the shares or awarded options to purchase them, as the case may be. The Applicant Company is also a beneficiary of all five Share Trusts.
From time to time the Applicant Company will pay dividends via a regulated intermediary (as defined in section 64D) to its shareholders, which will include the five Share Trusts, that have each acquired shares in the Applicant Company. The trustees of each Share Trust will, inter alia, resolve to allocate the dividends received on unallocated shares to the Applicant Company as a trust beneficiary.
The question which was the subject of the ruling was whether the Applicant Company was the beneficial owner of the dividends and therefore excluded from DWT in terms of section 64F. For a person to be the beneficial owner they do not necessarily require legal title to the dividend but merely have to enjoy entitlement to the benefit of the dividend. SARS ruled that the Applicant Company will be the beneficial owner of the dividends paid in respect of the unallocated shares, with the result that the exclusion in section 64F(a) of the Act would apply.
In similar circumstances this ruling will be very useful However, if the facts are different clarity should be sought.