Whether dividends withholdings tax is payable on a CC’s purchase of a member’s interest
21 November 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: A close
corporation (CC) has two members. The one member is going to resign his
membership for a compensation of Rx. He will be subject to CGT. The remaining
member then has a 100% member’s interest in the CC with a reduced value because
of the payment.
If a CC purchases a members interest per section 39 is dividends
withholding tax payable on the amount of the purchase?
A: Based on your
reference to section 39 of the Close Corporation Act we accept that the
transaction is one whereby payment is made by the corporation in respect of its
acquisition of a member's interest in the corporation. We accept that all the requirements of the
Close Corporation Act in this regard were observed.
From an Income Tax point of view the contributed tax capital
of the company (close corporation is a company for tax purposes) is reduced
when the member's interest in the corporation is acquired. The transaction is therefore one whereby an
amount is transferred or applied by a company that is a resident for the benefit
or on behalf of any person in respect of any share in that company and that
amount is transferred or applied as consideration for the acquisition of any
share in that company. It is therefore a
dividend as defined in section 1(1) of the Income Tax Act, but not to the
extent that the amount so transferred or applied results in a reduction of
contributed tax capital of the company.
The amount that reduces the contributed tax capital is a
return of capital (as defined in section 1(1) of the Income Tax Act) and is in
respect of the disposal of the member’s interest (and a capital gain). The rest of the amount (the R350k less the
return of capital) is a dividend subject to the dividends tax.
Disclaimer: Nothing in
this query and answer should be construed as constituting tax advice or a tax
opinion. An expert should be consulted for advice based on the facts and
circumstances of each transaction/case. Even though great care has been taken
to ensure the accuracy of the answer, SAIT do not accept any responsibility for
consequences of decisions taken based on this query and answer. It remains your
own responsibility to consult the relevant primary resources when taking a