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National Treasury shows some flexibility on share buy-back rules

Wednesday, 25 October 2017   (0 Comments)
Posted by: Authors: Joon Chong and Wesley Grimm
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Authors: Joon Chong (Partner) and Wesley Grimm (Candidate Attorney), Webber Wentzel

The Taxation Laws Amendment Bill (TLAB), released on 25 October 2017, proposes measures intended to target certain share buy-back and dividend stripping arrangements. Exempt dividends which are "extraordinary dividends" received or accrued (i) 18 months prior to a disposal of shares; or (ii) in respect, by reason or in consequence of such disposal, could result in these dividends being treated as income or proceeds for capital gains tax (CGT) purposes. This would be the case if a shareholder company holds a "qualifying interest" in the company distributing these "extraordinary dividends". These dividends would be treated as income if the shares were held as trading stock, and as proceeds, if held as capital assets.

For unlisted companies, a "qualifying interest" is at least 50% of the equity shares or voting rights in the company making the distribution, or 20% if no other shareholder holds a majority. For listed companies, any shareholder holding at least 10% of equity shares or voting rights would have a qualifying interest.

For preference shares with dividends expressed as a rate, an "extraordinary dividend" is any exempt dividend received or accrued which rate is more than 15%. For any other share, extraordinary dividends are exempt dividends that exceed 15% of the higher of the market value of the shares disposed of (i) at the beginning of the 18 month period; or (ii) on the date of disposal of the shares.

As is typical with anti-avoidance measures, these provisions come into effect on the date the draft TLAB was circulated (19 July 2017), and will apply to any disposals on or after this date. However, to provide some relief, these provisions should not apply to agreements which had been signed by 19 July 2017, although not yet unconditional on this date.

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