The 2019 tax legislation amendment cycle commenced on 25 June, when National Treasury issued the initial batch of the Draft Taxation Laws Amendment Bill which covers specific provisions that require further consultation. National Treasury will be publishing the full text of the 2019 Draft Taxation Laws Amendment Bill for public comment in mid-July 2019. One of the topics for amendment in the first batch deals with apparent abusive arrangements aimed at avoiding the anti-dividend stripping provisions.
Anti-avoidance rules dealing with dividend stripping were first introduced in 2009. Dividend stripping occurs when a shareholder company intending to divest from a target company avoids capital gains tax that would ordinarily arise on the sale of shares. This is achieved by the target company declaring a large dividend (to the shareholder company) before the sale of its shares to a prospective purchaser. This pre-sale dividend (normally exempt from dividends tax in the case of a company-to-company declaration) decreases the value of shares in the target company. As a result, the shareholder company sells the shares at a lower amount, avoiding the burden of capital gains tax in respect of the sale of shares.
In 2017 and 2018, several amendments were made to strengthen the anti-avoidance rules dealing with dividend stripping. Currently, certain exempt dividends (called extra-ordinary dividends), received by a shareholder company are treated as taxable proceeds in the hands of the shareholder company, as long as the shares in respect of which extra-ordinary dividends are received, are disposed of within a certain period, thereby eliminating the planning opportunities that dividend stripping presented.
National Treasury has indicated that it has come to Government’s attention that specific alleged abusive tax schemes aimed at circumventing the anti-avoidance rules dealing with dividend stripping arrangements are currently in the market. Essentially, a substantial dividend distribution by the target company to the shareholder company is done, combined with the issuance (by the target company) of its shares to the purchaser. The result is a dilution of the shareholder company’s effective interest in the shares of the target company that does not involve the disposal of those shares by the shareholder company. The shareholder company retains a negligible stake in the shares of the target company without triggering the current anti-avoidance rules.
In terms of the proposed amendments, the anti-avoidance rules will no longer apply only at the time when a shareholder company disposes of shares in a target company, as is currently the case. Furthermore, if a target company issues shares to another party and the market value of the shares held by the (current) shareholder company in the target company are reduced by reason of the shares issued by the target company, the shareholder company will be deemed to have disposed of and immediately reacquired its shares in the target company, thus creating value-shifting. This happens despite actual disposal not taking place, which could lead to adverse capital gains tax consequences.
It is expected that the proposed amendments, currently open for public comment, will be met with some severe criticism from the industry, especially since several legitimate BEE schemes could be impacted if the proposals are accepted as currently proposed.
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