Contributed tax capital (‘CTC’) is a tax concept that in essence is the consideration that is received by or that accrues to the company from the issue of its shares. It is defined in relation to each class of a company’s shares. In the case of a non-resident company that becomes a South African resident company (due to the company’s place of effective management changing to South Africa), CTC is defined as the market value of all the shares in the particular class immediately before the date on which the company becomes a South African resident. The definition of CTC underwent recent amendments to counter perceived avoidance and the 2023 Budget Review proposes further amendments.
Government has identified a structure where a foreign holding company that holds shares in a valuable South African operating company, through a foreign intermediary company, could avoid dividends tax by changing the tax residency of the foreign intermediary company to South Africa. When the change in residency occurs, as noted above, the CTC of the (newly South African resident) intermediary company would be equal to the market value of its issued shares. If the South African operating company thereafter were to distribute dividends to the intermediary company, such dividends would be exempt from South African taxation because dividends between South African resident companies are generally not subject to tax. When the intermediary company makes distributions to the foreign holding company, such distributions may be returned out of CTC rather than as dividends. They would then be regarded as capital distributions, which would not be subject to dividends tax or capital gains tax in the hands of the foreign holding company, provided that the underlying operating company was not South African immovable property rich and the shares in the intermediary company was not effectively connected with a permanent establishment of the foreign company in South Africa. Amendments will be proposed to address this situation.
As a separate issue, Government also wishes to clarify the translation rules around CTC that is denominated in a currency other than rands.