On 6 September 2012 it has been published that South Africa’s Minister of Finance has announced the closing of tax avoidance schemes which have arisen with regard to the operation of the new dividends tax.
The dividends tax came into effect on April 1, 2012 at a rate of 15% and is designed to replace the former secondary tax on companies (STC). The latter applied at the company level, while the new tax is levied on shareholders when they receive their dividend payment.
In one of the most notable schemes, for example, a listed company declares dividends to its shareholders. After declaration, but before payment, a foreign shareholder who expects to receive dividends from the company sells the right to those dividends to an independent South African company in exchange for a foreign currency equivalent (less a fee).
The sale of the shares by the foreign shareholder is viewed as foreign source income. The receipt of dividends by the South African company after the sale is allegedly viewed as an exempt company-to-company dividend.
In addition, the company paying a dividend with overstated STC credits will become liable for any tax shortfall, as only the company paying the dividend has control over these calculations.
The draft 2012 Taxation Laws Amendment Bills have been amended urgently to introduce the close tax avoidance measures relating to dividend conversion schemes, and the National Treasury and SARS are formally requesting public comments, by September 7, in respect of the proposals, including the revisions addressing the misuse of STC transitional credits.
