Most Read Contributor in South Africa, September 2016
Recent amendments were made to both the local dividend income
tax exemption in section 10(1)(k)(i) of the Income Tax Act, 1962
("the Act") as well the foreign dividend income tax
exemption in section 10B of the Act, in terms of the Taxation Laws
Amendment Act, No. 31 of 2013.
In terms of these amendments, the local and foreign dividend
income tax exemptions will not be available to any dividend or
"received by or accrued to a person in respect of
services rendered or to be rendered or in respect of or by virtue
of employment or the holding of any office,other
than a dividend received or accrued in respect of a restricted
equity instrument as defined in section 8C held by that person or
in respect of a share held by that
person" (our underlining).
These amendments came into effect on 1 March 2014 and are
applicable in respect of any dividends or foreign dividends
received by or accrued on or after that date.
The amendments follow earlier amendments to the local dividend
exemption in terms of which paragraph (dd) of the proviso to the
local dividend income tax exemption in section 10(1)(k)(i) was
introduced. This proviso (which remains in force) provides, broadly
speaking, that a dividend in respect of a "restricted equity
instrument" as contemplated in section 8C of the Act, is not
the restricted equity instrument is an "equity share"
other than an "equity share" that would have constituted
a "hybrid equity instrument" as contemplated in section
8E(1) but for the three-year period contemplated in that
the dividend itself constitutes an "equity
the restricted equity instrument constitutes an interest in a
trust and, where the trust holds shares, all of the shares
constitute "equity shares" other than an "equity
share" that would have constituted a "hybrid equity
instrument" as contemplated in section 8E(1) but for the
three-year period contemplated in that definition.
The new exceptions to the local and foreign dividend exemptions
as well as the previous exceptions to the local dividend exemptions
in proviso (dd) thereof are aimed at taxing dividends which
constitute disguised salaries. The application of the exclusions is
limited to specific circumstances and should be considered having
regard to the nature of the incentive scheme and the facts of each
case. However, where an incentive scheme has any or a combination
of the following characteristics it would be advisable to carefully
consider whether any of the exclusions to the dividend or foreign
dividend income tax exemptions will be applicable:
where special classes of shares are utilised in the incentive
where the employees hold their interests in the share incentive
scheme through a trust;
where the employees obtain dividends pursuant to a cession of
the dividends to the employees or a trust;
where there is a redemption obligation on the company issuing
the shares or a corresponding right in the hands of any person to
require the company issuing the shares to redeem the shares;
where the dividend distributions are determined with reference
to factors such as services rendered, employment or the holding of
any office (including where the distribution of the dividends by a
trust to employee beneficiaries are determined based on such
where the shares are not registered in the names of the
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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