SOUTH AFRICA: LIMITATION ON THE USE OF CONTRIBUTED TAX CAPITAL
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 in 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. An attempt in 2021 to bolster these measures caused great concern that the entire proceeds of a specific share repurchase/redemption from some (but not all shareholders) of a particular class of shares, will always be a dividend, potentially subject to dividends tax, without the ability to return to a shareholder on a tax neutral basis, the capital invested.
The effective date of the 2021 botched proposal was pushed out to provide an opportunity for further discussion. The matter has now been settled with the release of the Taxation Laws Amendment Bill on 25 October 2022. The amendment comes into operation on 1 January 2023.
It will remain possible to return CTC to only those shareholders who participate in a share repurchase/redemption. However, it is clear from the new limitations set out below that there is no ability to allocate a different amount of CTC to different participating shareholders:
- Each share in the class in respect of which there is a distribution, redemption, repurchase or share cancellation must be transferred an equal amount of CTC; AND
- The amount of CTC transferred per share is capped, and cannot exceed the total amount of CTC in respect of that class of shares divided by the total number of issued shares within that class.