Refining the participation exemption for the sale of shares
01 March 2023
Section 10B(2)(a) of the Income Tax Act contains the foreign dividend participation exemption which applies to foreign dividends received by or accrued to any person from a foreign company with a dual listing on a South African stock exchange.
This exemption from income tax applies where the taxpayer holds at least 10% of equity shares or voting rights in that foreign company. Section 10B(2)(a) further states that the taxpayer may hold the 10% interest in the foreign company alone or with any other company that forms part of the same group of companies.
A similar exemption from Capital Gains Tax exists in paragraph 64B of the Eighth Schedule applicable to qualifying disposals of foreign shares to non-connected non-residents. This paragraph states that any capital gain or loss arising from the disposal of foreign shares to a non-resident must be disregarded, provided the seller held at least 10% equity shares or voting rights in that foreign company, alone or with other group companies.
These exemptions were introduced to encourage the repatriation of foreign dividends and proceeds from the sale of foreign shares back to South Africa.
Treasury has however identified transactions that do not achieve this objective. An example is a transaction that involves the restructuring of a group by introducing a recently formed non-resident purchaser company which does not result in a change to the ultimate shareholding. Treasury proposes changing the tax legislation to not grant a participation exemption where shares are sold to a non-resident company that formed part of the same group as the seller, or the shareholders of the non-resident company are substantially the same shareholders of any company in the group disposing of the shares.
Disregarding the capital gain or loss in these circumstances will potentially result in these proceeds leaving the SA tax net for good. An amendment restricting such scenarios is welcomed provided it does not restrict legitimate transactions.
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