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Loans disguised under share schemes are no more - it is time to restructure

29 May 2014   (0 Comments)
Posted by: Author: Hawa Bibi Hoosen
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Author: Hawa Bibi Hoosen (Grant Thornton) 

 The revised section 8E and newly introduced section 8EA of the South African Income Tax Act ('the Act') deems certain dividends and foreign dividends received in cash by any person on or after 1 January 2013, to be income, taxed in the hands of the shareholder. This has resulted in significant changes in the tax planning of companies and individuals alike.

The purpose of section 8E is to address and close the gap on schemes in which the shares issued are in substance a financing arrangement. In other words, instead of a granting a loan, the lender acquires shares and stands to receive tax free dividends, and not interest, from the borrower. This section applies to hybrid equity instruments only and the definition considers three types of shares, namely preference shares, shares other than an equity share and any other share.

This definition has been expanded on to include any type of shares that meet these criteria:

  • if there are any dividends or foreign dividends payable on such shares
  • if these dividends are calculated directly or indirectly by referencing a specified interest rate; or
  • the amount of capital subscribed for that share is directly or indirectly secured by a financial instrument, and that financial instrument does not constitute an equity share as defined.

Section 8EA is a follow-on to section 8E, and is applicable to situations where the shares in question are preference shares and third-party backed shares. Simplistically described, these shares encompass the following attributes:

  • an enforceable right exercisable by the shareholder or
  • an enforcement obligation is enforceable as result of any amount of any specified dividend, foreign dividend, return of capital or foreign return of capital not being received by, or accruing to any person entitled thereto
  • third-party backed shares in essence grants the holder of the shares the right to require some person other than the company to buy the shares from it

Section 8EA lists a number of exclusions, in which case this deeming provision will not apply, the overriding exclusion being that a share will not be construed to be a third-party backed share when that share was issued for a 'qualifying purpose' and the enforcement right or obligation is only exercisable against specifically mentioned persons. The list of persons is easily interpreted, however deciding or concluding on what is meant by a qualifying purpose has proven difficult.

There is no doubt that sections 8E and 8EA are laden with complexities and taxpayers are urged to seek professional advice to arrange their tax affairs most beneficially and to satisfy themselves of compliance with the Act's provisions.

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Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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