Most Read Contributor in South Africa, September 2016
In the 2013 Budget Review, which was released on 27 February
2013, specific mention was made that a research project is underway
in which consideration is being given to a unified treatment of
dividend cessions and manufactured dividends. As part of this
project it noted that consideration will be given to anti-avoidance
rules to eliminate the shift in the income from taxable parties to
exempt parties. The Budget Review states that the tax impact of a
dividend transfer depends on whether the transfer is a cession or a
dividend compensation payment. It notes that in the case of a
cession, the dividend generally retains its nature while in the
case of a dividend compensation payment, the payment is largely
deductible by the payor and largely includable by the payee. It
further states that both sets of rules continually give rise to tax
avoidance or mismatches that reduce the ultimate tax due on the
This announcement comes after the Income Tax Act 58 of 1962
("Act") has recently been amended to address the taxation
of these types of income both from an income tax and dividends tax
In terms of the current rules, taxpayers are required to
specifically include dividends in their gross income. Although
certain exemptions apply to dividends, in the case of a dividend
which has been received or accrued to a company in consequence of
any cession of the right to that dividend, this exemption would not
apply unless that cession or exercise is part of the disposal of
all of the rights attaching to a share. Therefore, any dividend
which a company currently receives as a result of a cession which
is not part of the disposal of all the rights attaching to a share,
that is, the typical dividend cessions, is included in a
taxpayer's gross income and subject to income tax. Similarly,
to the extent that a manufactured dividend is received or accrued
by a taxpayer, it would be included in the taxpayer's gross
income and be subject to tax. As such, broadly speaking, from
an income tax perspective, the receipt of dividends by a company as
a result of a cession of such dividend to the taxpayer and the
receipt of a manufactured dividend are both taxable receipts.
In addition, currently specific anti-avoidance measures exist
under the dividends tax provisions which apply to dividend cessions
and the receipt of manufactured dividends in certain
In particular, section 64EB(1) of the Act provides that where a
person that is a beneficial owner contemplated in section 64F (i.e.
beneficial owners who are exempt from dividends tax) acquires the
right to a dividend by way of a cession and that dividend is either
announced or declared before that acquisition, that dividend is
deemed to be a dividend paid for the benefit of a person ceding
that right. This sub-section does not apply to any cession in
respect of a share if the right to that dividend is ceded together
with all the rights attaching to that share.
In addition, section 64EB(2) provides that for dividends tax
purposes, where a person that is a beneficial owner contemplated in
section 64F (that is, beneficial owners who are exempt from the
dividends tax) borrows a share in a listed company from another
person and a dividend is either announced or declared before that
share is borrowed, so much of any amount paid by the person in
respect of that borrowed share does not exceed the amount of the
dividend is deemed to be a dividend paid for the benefit of that
The provisions in section 64EB were introduced with effect from
1 September 2012 and are applicable in respect of transactions
entered into on or after that date and amounts paid on or after 1
October 2012 in respect of transactions entered into before 1
Based on the explanatory memorandum to the Taxation Laws
Amendment Bill of 2012, these rules were introduced to close tax
schemes which emerged for the benefit of foreign shareholders that
reduces the dividends tax rate to zero (without any reliance on a
tax treaty) by converting the taxable payment of dividends into
exempt compensation, gains or income upon disposal.
Notwithstanding the introduction of these specific anti-tax
avoidance rules, based on the announcement in the Budget Review, it
appears that further changes are to be expected and such changes
will seek to align the tax treatment of the different income
streams. It remains to be seen what these changes will look like
and the impact they will have on the dividend cessions and the
payment of manufactured dividends. In the meantime, the current
provisions remain on the statute book and provide specific rules
dealing with dividend cessions and manufactured dividends.
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.
The expansion of the West African regional market to foreign investors, and the search for emerging markets has led to a continuous increase in business mobility and cross border investments with Nigeria.
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.
The major objective of the waiver is to promote voluntary compliance and consequently generate revenue for government which otherwise, could have been lost.
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).