What are the tax implications of receiving foreign dividends from listed shares?
24 June 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: A South
African individual taxpayer owns shares in a foreign property development
company which is listed on a foreign stock exchange. He has been advised that,
in lieu of dividends, he may purchase additional shares.
Please advise on the following:
What is the tax implication if he receives
If he takes shares instead of dividends, how
will the shares be taxed?
A: We are not
sure if we understand the issue. You
mention that ‘in lieu of dividends’ the taxpayer ‘may purchase additional
shares’. Our guidance assumes that the
dividends are not used to acquire the new shares (or his own money) – in other
words, that the issue is the receipt of a foreign dividend or a return of
capital. If this assumption is not
correct our guidance will not be appropriate and you must provide us with more
detail to enable us to respond.
We can’t comment on whether or not the option is available
to the person (you say "if he takes shares instead”). We will only provide guidance with respect to
the issue as identified by us.
We submit that the dividends declared and distributed by the
company which is listed on the foreign stock exchange will be a foreign
dividend as defined in section 1(1) of the income Tax Act. A foreign dividend is gross income for an RSA
tax resident, but qualifies for certain exemptions – see section 10B. In terms of section 10B(2) any foreign
dividend received by or accrued to a person is exempt from normal tax to the
extent that the foreign dividend is received by or accrues to that person in
respect of a listed share and does not consist of a distribution of an asset in
specie. In terms of section 1(1) a
‘listed share’ means a share that is listed on an exchange as defined in
section 1 of the Financial Markets Act and licensed under section 9 of that Act. If this exemption doesn’t apply the amount of
the foreign dividend will be determined by using the ratio of the number 25 to
the number 40.
If the company doesn’t declare a dividend, but rather
reduces its contributed tax capital, the distribution will not be a dividend,
but a return of capital. As this would
be a disposal a capital gain or loss will result and the amount of the ‘foreign
return of capital’ would be the proceeds.
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 decision.