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Whether dividends withholdings tax is payable on a CC’s purchase of a member’s interest

Friday, 21 November 2014   (0 Comments)
Posted by: Author: SAIT Technical
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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 decision.



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