SOUTH AFRICA: BEWARE – YOUR INVESTMENT IN A SOUTH AFRICAN COMPANY COULD BE TAXED ON REPURCHASE

The consideration given in return for the issue of shares is referred to as ‘contributed tax capital’ (CTC) for tax purposes. A future distribution in respect of the shares so issued can include a reduction of CTC (if the directors so determine) and will not be subject to dividends tax.

The Income Tax Act contains measures to ensure that investors benefit pro rata from CTC in accordance with their shareholding percentages. These measures have been bolstered by the Taxation Laws Amendment Bill released on 11 November 2021, but with alarming consequences.

It is common for companies to repurchase shares from one (or some), but not all shareholders. On repurchase one would expect it only fair that the company must be able to return to the investor the initial capital invested as a reduction of CTC on a dividends tax neutral basis.

The ability to do so will be no more. The entire proceeds of a specific share repurchase from some (but not all shareholders) of a particular class of shares will be a dividend, because CTC is not allowed unless ‘all shareholders of shares in that class participate in the transfer in the same manner and are actually allocated an amount of CTC based on their proportional shareholding’. 

The latter dividend will be subject to dividends tax at 20% (unless a specific exemption applies or the rate of tax is reduced through reliance on an applicable double tax convention).

Whilst a general repurchase of listed securities will not be subject to the limitation, a specific share buyback of both listed and unlisted shares will be impacted.

The amendment will come into operation 1 January 2022.