Although the overall economics of share lending arrangements ("share loans") and repurchase arrangements ("repos") may be comparable in certain instances, the legal nature of these transactions and the South African tax implications arising in respect of these transactions are quite different.
A share loan is often driven by a need for the underlying shares whilst a repo may be driven by a need for funding.
From a South African tax perspective, a specific dispensation is granted for share loans entered into over South African listed shares which meet the requirement of a "lending arrangement" as defined in the Securities Transfer Tax Act, 2007 ("STT Act"). Broadly speaking, in respect of qualifying lending arrangements, the share lender will, from an income tax and capital gains tax perspective, disregard the disposal of the shares to the borrower upon inception of the stock loan and disregard the acquisition of the shares from the borrower at the end of the term. The borrower will similarly disregard the initial acquisition of the shares from the lender as well as the subsequent disposal of the shares to the lender at the end of the term.
With regard to a repo, the tax treatment thereof will depend on, for example, whether the arrangement is treated as an interest-bearing instrument in terms of section 24J of the Income Tax Act, 1962 ("Act") for South African tax purposes. In such cases, the seller of the shares may be required to account for interest income in respect of the arrangement, whilst the purchaser of shares would need to meet various requirements in order to claim a deduction of "interest" in respect of the recharacterised loan. Repos are not afforded the dispensation that is provided to share loans as discussed above and the parties will therefore need to consider the income tax and capital gains tax implications arising upon the various disposal and acquisition legs of the repo.
From a securities transfer tax perspective, an exemption from STT applies to the transfer of shares between the lender and the borrower in the event that the share loan qualifies as a lending arrangement. No such exemption applies to a repo over shares and the parties would need to consider if any other STT exemption may apply in the circumstances.
The South African dividend withholding tax regime specifically deals with share loans and repos entered into in respect of South African listed shares. Manufactured payments made by a borrower of shares to the lender over the term of the share loan may be subject to dividends tax at the rate of 20% in the event that the share loan spans a dividend date in respect of the underlying shares and certain other requirements are met. In respect of repos, the seller of shares may be deemed to be the beneficial owner of the dividend for dividends tax purposes in instances where the shares are acquired and held by the purchaser of shares over a dividend date, and where such purchaser receives the dividend.
The income tax treatment of dividends received by a borrower of shares and the purchaser of shares under a repo is also subject to a number of provisions that may render such dividends or portions thereof as taxable in the hands of the recipient.
Determining the South African tax treatment of repos and share loans which are commonly used in financial markets requires careful consideration despite such transactions having comparable economic outcomes in some instances.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
