Since the introduction of dividends tax in 2012, in particular the company to company exemption, taxpayers have employed a number of methods to convert taxable proceeds upon the sale of shares into non-taxable dividends. The National Treasury has proposed a broad anti-avoidance provision that is likely to curb such arrangements but also impact many other share disposal transactions.

The National Treasury published the draft Taxation Laws Amendment Bill (TLAB) for 2017 on 19 July 2017. This article considers the proposed amendments affecting share disposals and related dividend stripping arrangements.

Current legislation

The disposal of shares and methods employed by taxpayers to convert taxable proceeds into nontaxable dividends have been a concern to SARS and the National Treasury over the past few years.

If a taxpayer disposes of shares to a third party, this disposal will be subject to capital gains tax if the shares were held on capital account. If the shares were held for trading purposes, the gain that arises on the sale will be income in nature.

As an alternative to selling shares, the value of a shareholding can be realised by extracting this value in the form of a dividend. In the context of the Income Tax Act, a dividend includes a distribution of an amount by a company to its shareholders as well as an amount transferred by a company to a shareholder when the company buys a share back from the shareholder.

Since 2012, when dividends tax replaced STC, an exemption from dividends tax has existed for dividends paid by a South African resident company to another South African resident company. This exemption exists to prevent a cascading effect where dividends tax is imposed on the same profits at multiple instances in a layered company structure.

The exemption has however enabled shareholders to realise value in a disposal transaction through dividends, which do not attract tax, as opposed to ordinary sales proceeds, which is subject to tax. Limited anti-avoidance rules aimed at dividends funded by purchaser loans exists. A requirement to report certain transactions was also introduced.

Proposed amendment



In response to these arrangements the National Treasury proposes to introduce, with effect to any disposal of a share on or after 19 July 2017, a much wider anti-avoidance provision. The provision targets the disposal of shares in a company by any other company that may be in a position to influence the form in which it realises the value of its shareholding. As such, the proposed provision will apply to a company that holds a qualifying interest in the other company, being at least :

  • 50% of the equity shares or voting rights in the other company, or
  • if no person holds a majority of the other company's equity shares and voting rights, 20% of the equity shares or voting rights.

If a company held such a qualifying interest at any time in the 18 months prior to disposing of shares in the other company, any dividend (which was not subject to normal tax or dividends tax, as would generally be the case) that it received in respect of the disposed shares within the 18 months prior to its disposal or that it receives as result of the disposal (share buy-back) will be tainted and treated as proceeds (shares held on capital account) or income (shares held as trading stock).

This proposal will affect all share buy-back transactions from companies with a significant stake in another company. The impact of the proposal appears to be much wider than merely dividends stripped in the course of potential avoidance transactions, as described earlier.

In conclusion



The TLAB is still open for comment. The content of the final amendment may differ from this proposal. Taxpayers and advisors should keep a close eye on the developments over the next few months.

(August 2017)


Pieter van der Zwan, the author of this article, presents a monthly tax webinar with 2020 South Africa and the IAC.
Join us on the 2nd Tuesday of every month from 3:00 - 4:00 PM (GMT+2)
Register at: https://attendee.gotowebinar.com/register/3197166886957639428


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.