Amendments to Company Dividends Tax
05 March 2012
Posted by: SAIT Technical
Amendments to Company Dividends tax
PKF February Newsletter
On 20 December 2011 the Minister of Finance Gazetted that, with effect from 1 April 2012, Secondary Tax on Companies ("STC”) will ber eplaced with a dividends tax to be levied at shareholder level, except in respect of dividends in specie which would remain the liability of the company. Thus with the imminent introduction of this new dividends tax ("DT”), taxpayers are left with only a short time in which to adequatelyprepare for the DT.
The main reason given by SARS for the change from STC to DT isthat STC (as a tax on companies) created the impression that South Africa’s corporate tax rate was higher than that of other emerging markets, thereby disincentivising inbound foreign investment.
Furthermore, the introduction of DT aligns South Africa with international standards and best practice where the recipient ofthe dividend is liable to the tax relating to the dividend and not the company paying it.
Broadly, DT is a tax imposed on shareholders or rather beneficial owners (being the person entitled to the benefit of the dividend and not necessarily the registered shareholder) at a rate of 10%on dividends paid by the company. STC, on the other hand, is a tax imposed on companies (at a rate of 10%) on the declaration of dividends.
DT is categorised as a withholding tax, as, with exception for dividends in specie, collection of the tax is withheld and paid to SARS by the company paying the dividend or by a regulated intermediary("RI”) (a RI is defined, in the Income Tax Act, No. 58 of 1962 ("TheAct”), and includes for example brokers and banks) on behalf of the beneficial owners.
The basic principles of dividends tax
Dividends, other than dividends in specie
In respect of dividends, other than dividends in specie, DT is borne by the beneficial owner at a rate of 10%. DT will only apply in respect ofdividends or foreign dividends paid by SA resident companies or non-resident JSE listed companies in respect of JSE listed shares. In this regard, foreign withholding taxes paid on the dividends paid by these non-resident listed companies, may be deducted from any DT due.
However, it is important to note that the beneficial owner, the company and the RI are all jointly and severally liable for the payment of DT until the liability is discharged. Further, the company or RI will be the first point of call for DT as a result of their withholding obligations.
For the purposes of DT a dividend is deemed to be paid on the earlier of the date on which the dividend is paid or becomes payable by the company declaring the dividend ("payment basis”).
In the previous legislation which introduced DT, the dividend wasdeemed to be paid when it accrued to the beneficial owner ("accrual basis”), and, generally, it accrued to the beneficial owner when it wasdeclared by the company.
The reason for the change from an accrual basis to a payment basis is that SARS recognises that there may be a delay between the dateof declaration and the date of payment of the dividend, for example,a closely held company may declare a dividend far in advance of cash available to distribute the profits, before the introduction of newshareholders¹. Furthermore, a RI cannot practically be expected to withhold cash on dividends without receipt of such cash. Hence the change from an accrual basis to a payment basis in respect of the timing of the DT liability.
The DT liability must be paid by the last day of the month following the month in which the dividend was deemed to be paid.
Dividends in specie
The taxing of dividends in specie is different. In this case, the DT liability remains the liability of the resident company and does not shift to the beneficial owner.
The timing as to when the DT liability arises is the same as any ordinary dividend, dealt with above. The amount of the in speciesdividend represents the market value of the asset on the date that the dividend is deemed to be paid.
Exemptions from dividends tax
The following beneficial owner’s are exempt from DT:
A South African resident company. It should be noted, for dividends paid between SA resident companies, there is no requirement for these companies to be within the same group of companies;
Public benefit organisations;
An institution, board or body that conducts research, provides services to the State or general public or that promotes commerce, industry or agriculture as contemplated in s 10(1)(cA)of the Act;
A closure rehabilitation trust, as contemplated in s 37A of the Act;
Pension, provident and similar funds;
A parastatal exempt in terms of s 10(1)(t) of the Act;
A shareholder in a registered micro business, to the extent that the aggregate amount of the dividends paid by that registered micro business to its shareholders during the year of assessment in which that dividend is paid does not exceed the amount ofR200,000;
A natural person upon receipt of an interest in a primary residence as envisaged in paragraph 51A of the Eighth Schedule to the Act; and
A non-resident receiving a dividend from a non-resident company which is listed on the JSE.
The same exemptions apply to dividends in specie.
Obligations in respect of DT
The DT, in essence, requires the company declaring the dividend to withhold DT, either on behalf of the beneficial owner or in the case of dividends in specie, for its own account, on payment of the dividend.
However, liability for DT shifts if the dividend is paid to a RI, and the dividend is not a dividend in specie, so that the primary withholding obligation falls with the RI.
RI’s include central securities depository participants (CSDP), brokers,collective investment schemes in securities and listed investment service providers.
Obligation of companies declaring and paying dividends.
The obligation to either withhold DT at a rate of 10%, on behalf ofthe beneficial owner, or to pay DT at a rate of 10%, in the case of dividends in specie, may be avoided/reduced if the company:
Has a written declaration from the beneficial owner that the beneficial owner either:
Qualifies as an exempt person as listed above; or
Qualifies for tax treaty relief (or would have qualified for tax treaty relief had the dividend not been a dividend in specie); and
Has a written undertaking from the beneficial owner to inform the company, in writing, should the beneficial owner dispose of the share.
The company is automatically exempt from withholding DT where the company:
Pays the dividend (other than a dividend in specie) to a RI (the RI then becomes liable for withholding DT) in the case of dividends paid in respect of listed shares; or
Forms part of the same group of companies (as defined in s 41of the Act) as the company receiving the dividend, i.e. a dividend within a resident group of companies.
These are exemptions and no written declarations are required.The written declarations referred to above will have to be in a form as prescribed by SARS.
The written declaration and undertaking in the case of dividends other than dividends in specie, must be submitted at the earlier ofthe date set by the company or the date of payment of the dividend.Late declarations and undertakings can still be used in order to claim refunds.
In the case of dividends in specie, the written declaration and undertaking must be submitted by the date of payment of thedividend. If the declarations and undertakings are not timeously submitted there is no mechanism whereby the company can obtain arefund.
It should be noted that if an unlisted company does not withhold and pay DT as required, every shareholder or director of the company,who controls or is regularly involved in the overall management of the financial affairs of the company, becomes personally liable for the taxas well as any additional tax, interest or penalties levied.
Obligations of RI’s
Where a company pays a dividend to a RI, the RI is liable to withhold DT at a rate of 10% unless:
The dividend constitutes a dividend in specie;
Another person has paid the tax;
The beneficial owner is exempt, or qualifies for a reduction in terms of a double tax treaty (any person who qualifies for anexemption or reduction must submit a written declaration and undertaking, as referred to above, to the RI); or
The dividend is payable to another RI.
The same timing rules applicable to companies in respect of the written declarations and undertakings apply to RI’s.
Refunds of DT withheld due to late declarations
Refunds of DT withheld by companies
Where DT is withheld in respect of a dividend (other than a dividendin specie) a beneficial owner who qualifies for an exemption but didnot submit a declaration to the company in time, has 3 years after payment of the dividend to submit the declaration.
The company must refund and pay over the DT that is refundable tothe beneficial owner out of:
DT withheld on any subsequent dividend paid within 1 year from the submission of the declaration; or
Where the refundable DT exceeds the DT withheld or no subsequent dividend is paid, the refundable DT or the balance thereof must be recovered from SARS.
No refund may be claimed after 4 years from the date when the DT was withheld.
Company X has five shareholders, four of whom are individuals and one is Company Y (african company). All shareholders holdan equal 20% interest in Company X.
Company X pays a dividend of R300 000 on 10 April 2012 (equating to R60 000 to each shareholder before subtraction of DT). Company Y fails to submit a timely declaration indicating Company Y’sentitlement to exemption. Company Y submits the declaration on18 May 2012 (in respect of the dividend, which was paid on 10 April2012). Company X pays a further dividend of R100 000 to each shareholder on 10 January 2013.
Because of the late submission of the declaration, Company X must withhold the R6 000 from the R60 000 dividend paid to Company Y. However, Company Y can claim a refund because the declaration was submitted within 3 years after the dividend was paid. CompanyY will receive the full R6 000 once Company X withholds DT from the R100 000 paid to its shareholders in early 2013 because Company X can retain R6 000 of the withholding tax otherwise due to SARS.
The facts are the same as Example 1, except that the 2013 taxable dividend amounts to only R20 000 per shareholder.
Company X can only draw upon R2 000 withholding tax otherwise due to SARS as a source for the refund. Assuming no other dividends are paid by Company X in 2013, Company X must seek recovery from SARS for the remaining R4 000 refundable amount.
Refund of DT withheld by RI’s
If an amount of DT is withheld by a RI in respect of a dividend paid by a company, other than a dividend in specie and a beneficial owner submits a late declaration within 3 years after payment ofthe dividend, the RI must refund the DT to the beneficial owner. Therefund must be funded from any amount of DT withheld by the RI after receipt of the declaration.
Use of unutilised STC credits
STC is payable on the excess of dividends declared over dividends accrued during a dividend cycle, and the excess of dividends accrued over dividends declared is carried forward at the end of the dividend cycle to be set off against future dividends declared in the following dividend cycle. For the purposes of DT, a company is deemed tohave declared a dividend of nil on the day immediately before the effective date of the new DT regime, in order to trigger the end ofa dividend cycle. This enables the STC credits of the company tobe determined at the commencement of the new DT. These STC credits can be carried forward and may be set off against DT due on dividends paid.
A dividend paid by a company is not subject to DT to the extent thatt he dividend does not exceed the STC credits of the company and thecompany has by the date of payment notified the beneficial owner of the amount by which the dividend reduces the company’s STC credit. STC credits will be allocated pro-rata amongst all BOs entitled to the dividends within the same class of shares, irrespective of whether those beneficial owner’s are exempt from DT. Upon payment of a dividend after introduction of DT, STC credits will be exhausted first.
For example², Company X has two shareholders (Pension Fundand individual) that each hold 50% of its shares. Company Xhas R400 of STC credits (i.e. Company X has received R400 of dividends previously subject to STC). Company X pays R600 toits shareholders by way of dividend.
Of the R600 dividend, DT does not apply to the first R400 by virtue of the existing STC credits. Of the remaining R200, R100 is allocated to each shareholder. This means that R100 of the dividend (i.e. that is paid to Pension Fund) will be exempt, and the other R100 (i.e. that is paid to individual) will be taxed at 10%.
A company may not itself have STC credits but it may hold shares ina company which has available STC credits. In order to ensure that unutilised STC credits work their way up a chain of South African resident companies, whenever a dividend is paid and the STC creditsutilised, the company paying the dividend must notify the company to whom the dividend is paid, in writing, prior to paying the dividend,of the amount of the STC credit utilised against the dividend paid so that the corporate beneficial owner can utilise the STC credit.
For example, Company Y has STC credits of R500 and pays a dividend of R800 to its holding company, which then on-pays the dividend to its shareholders which represent a trust (50%shareholder) and Company X (50% shareholder). CompanyY will not withhold any tax because the dividend is paid to a company, but Company Y will advise its holding company,in writing, that the STC credit available for utilisation is R500.Therefore, when the holding company on-pays the dividend to the trust and Company X it will withhold DT on R150 of thedividend paid to the trust. No withholding tax is withheld on the balance of R150 paid to Company X as it is a resident South African company (provided Company X has submitted its written declaration and undertaking on time). Company X now has aR250 STC credit.
The STC credits must be utilised within five years after the change-over to the DT regime.
Revised dividend definition
With effect from 1 January 2011, the definition of dividend was changed in anticipation of the introduction of the new DT regime.In the Taxation Laws Amendment Act 24 of 2011 ("TLAA”) there are two categories of amendments, the first which is applicable retrospectively to 1 January 2011 and the second which is effective prospectively to 1 April 2012.
The only note worthy amendment falling within the first category is that a foreign dividend is excluded from the definition of dividend.
Taking into account the TLAA amendments, from 1 April 2012″dividend” means, any amount transferred or applied by acompany that is a resident, for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied by way of a distribution made oras consideration for the acquisition of any share (share buy-back).Specifically excluded from the definition of dividend is an amount transferred or applied which:
Results in a reduction of contributed tax capital ("CTC”);
Constitutes shares in that company, i.e. a capitalisation issue; or
A general share buy-back by a JSE listed company subject to certain specific JSE requirements.
The amount transferred may consist of money as well as the market value of any asset distributed. The distribution of a company’s own shares, i.e. a capitalisation issue, is not within the dividend definitionon the basis that these distributions do not result in an outflow of overall value from the company as all the underlying assets remainwithin the company.
It should be noted that where a company transfers an amount to a shareholder, it will not constitute a dividend to the extent that it represents a general repurchase by a listed company of its own securities, in terms of certain specific JSE requirements. Therefore,the shareholder will pay capital gains tax ("CGT”) and there will be no DT on such a distribution.
This exemption does not apply in respect of an unlisted company and any dividend arising from such an acquisition could be subject to DT in the hands of the shareholder (subject to exemption ifapplicable) and not CGT. The reason for this is that, practically, the shareholder in a listed company cannot distinguish this purchase from any other JSE market purchase.
Contributed tax capital ("CTC”)
Calculation of CTC
CTC is calculated in relation to each class of shares and includes:
Existing share capital and share premium as at 1 January 2011,excluding any amount which would have constituted a dividend under the old dividend regime in the case of a reductionin share capital and/or premium, i.e. tainted share capital/premium; and
Any further amounts received by a company upon issue ofshares after 1 January 2011.
CTC must be reduced by any amounts that have been distributed toa shareholder out of CTC.
In order for a transfer of an amount from a company to a shareholder to constitute a reduction of CTC, the directors should, immediately before the distribution and through a written confirmation (for example in the form of a director’s resolution),determine that the transfer is a transfer of CTC. Without this written confirmation no reduction of CTC can occur and the amount transferred would constitute a dividend subject to DT.
CTC must be maintained separately per class of share and distributed on a pro-rata basis to all shareholders of that class.Therefore, the company cannot distribute the share premium of, for example, Class A shareholders to Class B shareholders. This would require a company to keep separate record of its CTC per class of share for tax purposes.
Deletion of Value Extraction Tax ("VET”)
When DT was first introduced in the Revenue Laws AmendmentAct, 60 of 2008, the concept of VET was introduced. This tax wasto be an anti-avoidance measure, similar to the deemed dividend provisions contained in s 64C of the Act which sought to preventt ransactions which resulted in an extraction of value from a company without a dividend actually being paid.
However, VET has been completely repealed in the TLAA. The rationale for this is that SARS is of the view that the categorisationof certain forms of value extraction as automatic deemed dividends ignores the facts and circumstances giving rise to the value extraction which may result in a different conclusion.
Furthermore, the wording of the new dividend definition is regarded as broad enough to encompass a value extraction transaction as it covers any payments to shareholders in respect of any share.Now the determination of whether value extracted from a company amounts to a dividend or stems from some other cause must be resolved solely by reliance on the facts and circumstances.
Despite the deletion of the VET, there is a deemed dividend
implication where a loan or advance is made to person who is a resident trust or individual which/who is connected to the company,for example a 20% shareholder or a relative of such shareholder.
Furthermore, the loan/advance must have been made by virtue of such person’s shareholding in the company.
The amount of the deemed dividend is the difference between the official rate (as defined in the Seventh Schedule to the Act) and the amount of interest (if any) charged by the company.
This deemed dividend implication is effective from 1 April 2012.
With the pending introduction of DT a taxpayer must ensure that the necessary systems are in place to account for DT and STC creditsand to comply with the administrative requirements of DT.
The most important considerations are:
The determination of any STC credits at 31 March 2012;
In our view the IT56 form indicating the declaration of adividend of nil and quantifying the STC credits available for utilisation from 1 April 2012 should be submitted by 30 April 2012;
Procedures must be implemented to ensure that when STC credits are utilised within a chain of companies, that the company receiving the dividend receives written notice from the company paying the dividend timeously i.e. prior to paying the dividend to ensure that STC credits work their way up a chain of companies;
Procedures must be implemented to ensure that when STCc redits are utilised upon declaration of a dividend on orafter 1 April 2012, the beneficial owner’s are notified by thedate of payment of the dividend of the amount by which the dividend reduces the company’s STC credit; and
Procedures must be implemented to monitor STC credits and the utilisation thereof in respect of dividends paid on orafter 1 April 2012.
Declarations and undertakings
In order to ensure that DT is not unnecessarily withheld,companies and RI’s should obtain the relevant declarations and undertakings as to whether a beneficial owner qualifiesfor an exemption or a reduced tax rate (in terms of a doubletax treaty) as soon as possible.
SARS requires the submission of these documents wherethey are relied upon to reduce the DT liability. Companiesand RI’s must ensure that there are procedures in place to comply with these submission requirements.
Returns indicating the dividends paid by a company and received by the beneficial owner will have to be submitted in a form prescribed by SARS.
In a draft discussion document, which can be found on the SARS website ("the SARS discussion document”), SARS broadlysets out the anticipated supporting data which a company, RI and beneficial owner would have to submit to SARS in respect of DT. The data requirements and the approach which SARS anticipates following in implementing the data requirements,extracted from the SARS discussion document, are set out below:
The company paying the dividend is required to submitinformation about the dividend paid as well as informationabout the persons to whom the dividend was paid.
RI’s will be required to submit information about:
The entities from which the dividend payment wasreceived;
The company that paid the dividend;
The persons to whom the dividend was paid.
Beneficial owner’s who received dividends which were exempt from DT (such as South African companies,pension funds, etc.) will be required to submit information toSARS about the:
Entity that it was received from;
Company that paid the dividend.
In addressing how DT would be implemented members from ASISA, BASA, JSE, STRATE, etc., were included in discussions and it was agreed that the aforementioned data requirements would have to be phased in.
The SARS discussion document is not clear on who should submit what information and in what format, however it is in draft format and based on experience these issues will be clarified in due course once DT has been implemented and issues arise.
It is apparent from the above that the introduction of DT will result in yet another set of complex administrative rules and regulations increasing the already heavy compliance burden of the taxpayer. It would appear that the supporting data that will be required to be included in the DT return is substantial and whether SARS, nevermind the taxpayer, will be able to cope will have to be seen.
In conclusion, in order for companies, RI’s and beneficial owners to prepare for the introduction of the DT, the following is of importance:
Available STC credits should be established as at 31 March2012 and an IT56 form submitted by 30 April 2012 indicating the declaration of a dividend of nil and quantifying the STC credits available for utilisation from 1 April 2012.
Procedures should be implemented to monitor STC credits and ensure timely notification of the use thereof.
Companies and RI’s should obtain the relevant declarations and undertakings as to whether a beneficial owner qualifies for an exemption or a reduced tax rate (in terms of a double tax treaty) as soon as possible.
¹Explanatory Memorandum on the Taxation Laws Amendment Bill, 2011
²Explanatory Memorandum on the Revenue Laws Amendment Bill, 2008