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South African National Budget Speech 2017: Important proposed changes for businesses

22 February 2017
– 6 Minute Read


Tax increases of ZAR 28 billion were announced in the South African National Budget Speech 2017 by the Minister of Finance, Pravin Gordhan, on Wednesday, 22 February 2017. Changes included increased taxes on individuals (top marginal rate of 45%) and an increase in dividends tax from 15% to 20%.

The Minister highlighted key anti-avoidance measures relating to foreign companies held by trusts, share buyback transactions, contributed tax capital of foreign shareholders, and interest recoupment on debt reductions.


  • VAT and corporate income tax remains unchanged
  • For individuals earning over ZAR 1.5 million per year, there is a new marginal income tax “bracket” of 45%
  • Dividends tax increase to 20% – while this is perhaps intended to reduce the arbitrage opportunity between the effective tax rate for an individual trading through a company in comparison to the “top tax bracket” for individuals of 45%, this now creates arbitrage opportunities relative to other foreign withholding taxes, and a stronger preference for loan funding (subject to thin capitalization and other interest limitation rules).


  • Tax on sugary beverages will be implemented as soon as is practical.
  • Carbon tax is still scheduled to be implemented, with a revised bill for public consultation expected mid-2017.


Debt forgiveness for dormant group companies or companies under business rescue

The intragroup tax exemptions for debt forgiveness do not currently apply where the debt financed tax deductible expenditure.  This created practical difficulties, when trying to “clean up” and deregister dormant group companies.  This tax exemption is proposed to be extended to apply to dormant group companies or companies under business rescue, regardless of the use of the relevant debt.

Corporate reorganisation rules: assumption of contingent liabilities

Tax relief for assets transferred as part of a corporate reorganisation is currently limited to where payment is made in the form of shares, or in certain circumstances, in the form of cash or loans.  This can be problematic, for example where a business is transferred, and the business includes future contingent liabilities such as employee retrenchment or leave pay provisions.  The tax relief is proposed to be extended to include where payment is made in the form of assumption of future contingent liabilities.

Punitive tax treatment of loans to trusts – not applicable to employee share scheme trusts and trading trusts

Anti-avoidance measures on interest free and low-interest loans to trusts were introduced in the 2016 tax bills, triggering donations tax at 20% on the interest foregone.  It is proposed that these anti-avoidance rules will not apply to trusts that are unrelated to estate planning, for example trading trusts and employee share scheme trusts.

Third-party backed shares

Preference shares guaranteed by third parties are in certain circumstances subject to punitive tax treatment, as “third-party backed shares”.  While there have been some recent relaxations in relation to third-party backed shares, budget 2017 recognised that the exceptions to these rules, for “qualifying purposes”, are still too narrow.  The qualifying purposes rules will be further extended, to facilitate legitimate transactions.

Refinement of the venture capital company regime

It is proposed that the venture capital company regime will be amended to remove obstacles to investment, such as rules relating to investment returns and the qualifying company test.

Tax implications for acquisition of foreign intellectual property by South African multinationals

Currently, there are tax anti-avoidance rules in relation to payments made to non-residents for the use of “tainted” intellectual property.  Budget 2017 recognised that these rules may affect legitimate commercial transactions and discourage the use of South African-based group infrastructure to further develop offshore intellectual property.  For this reason, relaxation of the anti-avoidance rules will be considered.


Debt settled by issue of shares – recoupment of interest

An anti-avoidance measure on capitalised interest is proposed, in terms of which there is an income tax recoupment where shares are issued to settle debt.

“Contributed tax capital” of foreign shareholders

Budget 2017 highlighted that “government has identified a mechanism whereby companies with foreign parents increase their contributed tax capital, thus arguably avoiding the payment of dividends tax through capital distributions.”  There are various circumstances where an upliftment of contributed tax capital would have occurred in the past, owing to transactions entered into for various different commercial reasons including for exchange control or BEE purposes.  However, specific tax anti-avoidance measures, that aim to prevent this type of situation going forward, are proposed.

Share buyback transactions

In the 2016 annual Budget Speech, under the budget review, the Minister of Finance indicated that the wide-spread use of share buyback arrangements (where a shareholder exits by means of a share buyback, and a new shareholder subscribes for shares) merits a review to determine if additional countermeasures are required.  No amendments were introduced in 2016, and this transaction structure therefore continues to be a permissible manner to transact from a tax perspective (subject to the general anti-avoidance rules if for tax avoidance purposes and abnormal).  The 2017 Budget proposes that specific countermeasures be introduced to curb the use of share buyback schemes.

Controlled foreign companies:  Foreign companies held by trusts

Specific countermeasures are proposed to curb abuse where foreign companies are held by interposed trusts, as originally announced in the 2015 Budget review.

Further proposals include:

  • Alignment of the tax treatment of debt forgone for mining companies
  • Addressing the abuse of artificial repayment of debt
  • Anti-abuse measures in relation to the “in duplum” rule (which caps interest at the original capital amount)and tax legislation
  • Addressing circumvention of dividend-stripping rules
  • Interplay between real estate investment trusts (REITs) and corporate reorganisation rules
  • Extension of collateral and securities lending arrangement provisions to include listed foreign government bonds
  • Changes in the tax treatment of banks and financial institutions: Consideration of the tax treatment of banks and other financial institutions due to International Financial Reporting Standard (IFRS) 9; exclusion of impairment adjustments from the determination of taxable income in section 24JB; application of hybrid debt instrument rules in section 8F in respect of banks and other financial institutions that are taxed under section 24JB; and addressing the mismatch in the application of the provisions of paragraph 12A of the Eighth Schedule and section 24JB.
  • Tax amendments due to the Solvency Assessment and Management framework for long-term insurers
  • Mining environmental funds
  • Partial ownership of land donated under land-reform initiatives
  • Clarifying the scope of relief for international donor funding organisations
  • Assisting micro businesses growing into small and medium-sized enterprises
  • Tax treatment of foreign member funds
  • Changes to the tax treatment of domestic treasury management companies

Please feel free to contact our tax partners, Barry Garven, Betsie Strydom, Wally Horak and Patricia Williams for further information.