The release of the Taxation Laws Amendment Bill (TLAB) on 25 October 2017 includes a proposal which could have a significant tax impact for companies. The proposed amendments to Section 22B of the Income Tax Act No.58 of 1962 and Paragraph 43A of the Eighth Schedule to the Income Tax Act No.58 of 1962 aim to inflate the proceeds on disposal of shares by a company in another company, by treating exempt dividends received as income or part of proceeds from the disposal of those shares.
The basic mechanism of the transaction which would give effect to the above section is as follows:
If company A disposes of shares held in company B (company A should have had a “qualifying interest” in company B) and company A received a dividend from company B within 18 months of the disposal of the shares, the dividend (which would have been exempt from income tax and dividends withholding tax) may be treated as part of proceeds from the disposal of those shares in company A (where the shares were held as capital assets) or included in the income of company A (where the shares were held as trading stock).
A “qualifying interest” is defined as an equity holding or voting right of at least 10% in respect of a listed share while a qualifying interest is defined as an equity or voting interest of at least 50% held (or 20% if no other person holds a majority interest) whether alone or together with “connected persons” for unlisted companies.
The following conditions must be met for the above proposed amendments to be applicable:
- The exempt dividend is received or accrued to the company within a period of 18 months prior to the disposal or;
- The exempt dividend is received or accrued to the company by reason of or in consequence of the disposal and
- The company disposing of the shares held the shares as a capital asset (Paragraph 43A to the Eighth schedule) or trading stock (section 22B) immediately before the disposal.
The value of the dividend to be included in income or as part of proceeds from the disposal of shares is 15% of the market value of the shares at the beginning of the 18 month period or date of disposal (the larger of the two values) which exceeds the dividend received (referred to as an “extraordinary dividend” as defined in paragraph 19 (3)(c) of the Eighth Schedule to the Income Tax Act).
Roll-over relief, specific to that contained in Section 46 and 47 where dividends are declared in terms of an unbundling or liquidation distribution transaction will also be subject to the terms of these amendments should the dividends be deemed to be “extraordinary dividends”.
It is proposed that the amendments be backdated to 19 July 2017 which means that dividends received or accrued up to 18 months prior to that date may be taxed if the shares are disposed of post 19 July 2017.
Associate: Corporate Tax, Johannesburg
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