Most Read Contributor in South Africa, September 2016
It was announced in the 2012 budget speech of the Minister of
Finance, Pravin Gordhan, on 22 February 2012 that the taxation of
dividends will be increased from the current 10% secondary tax on
companies ("STC") to a 15% dividend withholding tax with
effect from 1 April 2012. Draft legislation confirming this
proposal has now been released.
The transition from STC to dividends tax has brought about
changes in respect of, amongst others, deemed dividends. Under the
STC regime, the general principle is that a loan granted by a
company to a shareholder or a connected person in relation to the
shareholder is deemed to be a dividend which is subject to STC at a
rate of 10% calculated on the principal amount of the loan, subject
to certain explicit exemptions.
The concept of "value extraction" was initially
intended to replace the current deemed dividends rules under the
STC regime. The tax would be triggered when any form of value was
extracted from a company for the benefit of connected persons in
relation to the paying company. Value extraction tax was scheduled
to come into effect together with dividends tax.
The value extraction regime was, however, completely deleted in
terms of the Taxation Laws Amendment Act No. 24 of 2011 (which was
promulgated on 10 January 2012) and the new dividends tax
provisions now provide that where, during any year of assessment,
any amount is owing to a company in respect of a loan or advance
provided by the company to a person
that is not a company;
is a resident; and
is a connected person in relation to that company or a
connected person in relation to the aforementioned person (that is
connected to the person who is connected to the company),
that company must, be deemed to have paid a dividend if that
loan or advance is provided by the company by virtue of any share
held in that company by a person who is connected to the
In terms of the latest Draft Taxation Laws Amendment Bill 2012
(dated 13 March 2012), it is proposed that the dividend that is
deemed to have been paid in terms of the above provision must be
deemed to consist of a distribution of an asset in specie.
One interesting difference between deemed dividends on loans to
shareholders in terms of STC compared with the dividends tax regime
is that the deemed dividends under the dividends tax will not be
calculated on the principal amount of the loan. Dividends tax will
only be charged on the difference between the "market-related
rate" and what the borrower actually is charged.
"Market-related interest" refers to the "official
rate of interest" as defined in the Seventh Schedule to the
Income Tax Act which is, in the case of a loan which is denominated
in ZAR, a rate of interest equal to the South African repurchase
rate plus 100 basis points.
Unlike STC, there is no tax "credit" when the loan is
repaid under the dividends tax regime.
The deeming rule will be triggered under dividends tax when a
loan or advance has been made to a resident person that is not a
company, for example a trust or a natural person who is a connected
person in relation to that company or a connected person in
relation to the aforementioned person, (that is connected to the
person who is connected to the company).
Broadly speaking, a "connected person" means, in
relation to a company, any person other than a company who
individually or jointly with any connected person holds, directly
or indirectly, at least 20% of the company's equity shares or
voting rights. A natural person is connected to any relative and to
a trust of which such natural person or such relative is a
beneficiary. A trust is connected to any beneficiary of the trust
and any connected person in relation to such beneficiary.
Some amendments were made to the "connected person"
definition but such are not relevant in the context of the new
deemed dividends provisions as the amendments only relate to when a
company is connected to another company.
The above new deemed dividends provisions come into operation
when the new dividends tax provisions come into operation. Such
date has been determined by the Minister of Finance as 1 April
2012. Dividends tax only applies to dividends declared and paid
after 1 April 2012. The Explanatory Memorandum on the Taxation Laws
Amendment Bill, 2011 (dated 27 January 2012) provides that the
deemed dividend provisions will only apply to distributions
received or accrued on or after 1 April 2012.
Some important differences between the STC and dividends tax
regimes have been illustrated above. It may be important,
especially in the transitional period, to determine under which
regime a loan will fall in order to determine the triggering of a
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.
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