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Anti-dividend stripping provisions

22 July 2019
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Further details have just been released regarding the revised anti-dividend stripping tax avoidance provisions, which were announced by Finance Minister Tito Mboweni on 20 February 2019.

These rules are intended to expand the scope of the dividend stripping provisions in the Income Tax Act, 1962 (the ITA), to also apply to ‘disguised sales’. Importantly, it is proposed that the new rules will have retrospective effect, applying with effect from 20 February 2019.

As explained in our Newsflash issued earlier this year after the Budget Speech, the ‘abusive arrangements’ were described to involve a target company distributing a substantial dividend to its current company shareholder and subsequently issuing shares to a third party.  This is in contrast to the previous version of the anti-dividend stripping provisions which did not apply in case of a dilution, but only where the current shareholder disposed of shares in the target company.

The revised rules are contained in the draft Taxation Laws Amendment Bill (draft TLAB) which was released on 21 July 2019.
To recap, the anti-dividend stripping provisions apply where Company A is a shareholder in Company B (the target company) and:

  • Company A disposes of shares in the target company;
  • Company A held a “qualifying interest” in the target company during the 18 months prior to the disposal; and
  • The target company declared exempt dividends in excess of a specific threshold (an “extraordinary dividend”) within 18 months prior to the disposal of the shares by Company A.

In these circumstances, the dividend would either have to be included in the income of Company A, or in its proceeds for capital gains tax (CGT) purposes.  An amount which would otherwise have been treated as an exempt dividend, could thus be subject to either income tax (28%) or CGT (22.4%) in the hands of the current shareholder.  The anti-dividend stripping rules do not prescribe negative tax consequences for the target company or for the new subscriber.

The latest draft proposal stipulates that a current shareholder will be deemed to have disposed of shares if the target company issues shares to a person other than Company A, and if Company A’s effective shareholding is reduced by reason of the new shares issued by the target company.  The result is that the anti-dividend stripping provisions could apply even if there was no share buy-back or other disposal.

The proposed amendment is still in draft and we will only have certainty regarding the details when the TLAB is issued in approximately October 2019.  Because these provisions will apply with effect from 20 February 2019, the uncertainty could pose risks that taxpayers need to keep in mind.  In particular, as the proposed wording does not consider the intent of the taxpayer, there is a risk that the expanded rules could also apply to a transaction where there is no intent to obtain a tax benefit.

Accordingly, it is recommended that great caution should be applied and tax advice should be sought in respect of scenarios where a company declared substantial dividends in an 18-month proximity to a share issue.
The Bowmans Tax Practice will be glad to assist with a risk assessment and to consider key alternatives such as whether it is possible to restructure or delay the transaction, or to provide feedback to National Treasury in respect of the proposed amendments in an attempt to ensure that they do not punitively affect legitimate transactions.