Generally, the issue of a share by a company does not constitute a disposal for purposes of capital gains tax. However, in 2013, paragraph 11(2)(b) of the Eighth Schedule to the Income Tax Act was amended to the effect that the issue of shares by a resident company for the exchange, whether directly or indirectly, of shares in a foreign company would constitute a disposal.
The reason for the change was that certain companies were entering into transactions involving, among others, the cross-issue of shares between a resident and non-resident company. These transactions would result in a shift of control of the resident company to an off-shore jurisdiction, and effectively a tax-free corporate migration. By treating the issue of the shares as a disposal by the resident company, it would generate an immediate capital gain for the resident company equal to the market value of the foreign shares (because the shares issued by the resident company would have no base cost).
The amendments were therefore introduced as an anti-avoidance measure, and as part of South Africa’s broader plan to curtail base erosion and profit shifting.
However, it is now recognised that the anti-avoidance provision has had unintended side-effects, specifically in that it stifles the growth and expansion of South African multinational companies. Without providing much detail, it is indicated in the Budget that the provision would be relaxed, but not necessarily scrapped.
The change is welcomed, and it is a particularly positive indication that the Minister is alert to the constraining effect that certain 'blunt instrument' anti-avoidance provisions can have on legitimate commercial transactions.