Most Read Contributor in South Africa, September 2016
South African residents are taxed on their worldwide
income. Accordingly, a capital gain arising from the sale of
shares in a foreign company will be subject to South African tax
unless an exemption applies or a double tax agreement provides
In particular, paragraph 64B of the Eighth Schedule to the
Income Tax Act, 58 of 1962 ("the Act") provides, inter
alia, that any capital gain or loss determined in
respect of the disposal of any equity share in any foreign company
(except certain shares where the value of the foreign company is
largely derived from South African immovable property or immovable
property rights and equity shares in certain foreign collective
investment schemes) should be disregarded, provided certain
requirements are met. This exemption is often referred to as
the "participation exemption".
It should be noted that the participation exemption only applies
to capital gains. If the proceeds from the
disposal of shares in a foreign company are revenue in nature, the
gain will be subject to income tax.
In terms of recent amendments to the Act in terms of the
Taxation Laws Amendment Act, 22 of 2012 ("TLAA"), the
participation exemption in paragraph 64B(1) now applies under the
the seller (whether alone or together with any other person
forming part of the same group of companies as that person)
immediately before that disposal held at least 10% of the
equity share capital and voting rights of the foreign
such interest had been held for at least 18 months
prior to that disposal, unless the seller is a company and
that interest was acquired by the seller from any other company
which forms part of the same group of companies and the seller and
that other company in aggregate held that interest for more than 18
that interest is disposed of to any person that is not a
resident, other than a controlled foreign company
("CFC"), for an amount that is equal to or exceeds the
market value of the interest.
Prior to the amendments in terms of the TLAA, the participation
exemption applied, inter alia, to the disposal of equity shares in
a foreign company to a CFC in relation to the seller or to a CFC
that formed part of the same group of companies as the
seller. Although the gain would have been disregarded in the
seller's hands, the acquiring entity's "base
cost" in respect of the shares would have been equal to the
"proceeds" (usually the purchase consideration).The
amendment to the participation exemption to exclude disposals to a
CFC came into operation on 1 January 2013 and applies in respect of
disposals on or after that date.
Although the sale of shares in a foreign company to a CFC no
longer qualifies for the participation exemption, in the case of a
disposal within a group, the "corporate rules" contained
in sections 42 to 47 of the Act may provide roll-over
In particular, in terms of section 42(1)(b), an
"asset-for-share transaction" means any transaction in
terms of which a company disposes of an equity share in a foreign
company, held by that company as a capital asset, to another
foreign company in exchange for the issue of an equity share in
that other foreign company (provided further requirements are
met). Similarly, the TLAA extended the scope of an
"intra-group transaction" envisaged in section 45 to
include any transaction in terms of which an equity share in a
foreign company, held by a company as a capital asset, is disposed
of by that company to another company ("transferee
company") in exchange for the issue of debt or shares (other
than equity shares) by that transferee company (provided further
requirements are met). In both instances it is envisaged that
the acquiring entity can/must be a CFC and that the seller and the
acquiring entity must form part of the same "group of
companies" as defined in section 1 of the Act, that is,
including non-resident entities.
Generally, where the corporate rules apply, the transferor is
deemed to have disposed of the asset in question for proceeds equal
to its base cost (resulting in no capital gain) whilst the
transferee is deemed to acquire the asset for expenditure equal to
the transferor's base cost.
Accordingly, although the participation exemption will no longer
apply to a disposal of shares to a CFC, in certain instances the
roll-over provisions of sections 42 or 45 may apply, thereby
resulting in no capital gain in the seller's hands.
However, importantly, unlike instances where the participation
exemption applies, the acquiring entity will not have a step up in
its base cost in respect of the shares in the foreign
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
Effective collaboration amongst government agencies, automation of processes and capacity building by tax authorities have always been identified by stakeholders as strategies for achieving an efficient tax system.
In response to information provided by FIRS, NSE has sent letters to publicly listed companies, who were purportedly identified by FIRS as non-compliant.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).