Ruling on share repurchase and transfer for no consideration

31 Jul 2015 2 min read Tax Alert Article

The South African Revenue Service (SARS) published Binding Private Ruling 194 (Ruling) on 15 June 2015. The ruling dealt with the disposal of shares by way of a share repurchase by a resident company from a non-resident shareholder for no consideration, and a subsequent donation by the non-resident of shares to a resident company.

The Applicant was a resident private company, whose shareholders were HoldCo (68.2%), Company B (17.8%) and Company C (14%). The Applicant’s shareholders were also resident private companies. Company B was a broad-based black economic empowerment company.

A certain Investor A was a non-resident who held 5.16% of the ordinary shares in HoldCo.

The Applicant, HoldCo, and Investor A, for benevolent purposes, proposed the following transaction:

  • the Applicant would donate 4% of its annual profits to charitable causes;
  • to compensate the shareholders of the Applicant, HoldCo would repurchase (and cancel) a portion of Investor A’s shares in HoldCo for no consideration; and
  • Investor A would transfer the balance of its shares in HoldCo to Company B for no consideration, in order to ensure that Company B remains in the same economic position.

SARS ruled that:

  • The share repurchase would not result in any inclusion in HoldCo’s gross income, nor would it constitute a disposal by HoldCo for capital gains tax purposes.
  • Securities transfer tax would be payable in respect of the share repurchase as well as the share transfer to Company B at 0.25 % of the market value of the shares, and HoldCo would be responsible for payment.
  • The share repurchase and share transfer would not result in any inclusion in Investor A’s gross income (from a South African tax perspective), nor would there be any capital gains tax consequences for Investor A because the assets do not fall within the ambit of paragraph   2(1)(b) of the Eighth Schedule to the Income Tax Act,   No 58 of 1962 (Act).
  • The repurchase would not result in a dividend for purposes of dividends tax (presumably because the repurchase is for no consideration).
  • Investor A would not be liable for donations tax in respect of the share repurchase and the share transfer because he is a non-resident.
  • The annual donations to be made by the Applicant would be deductible by the Applicant to the extent that such donations comply with s18A of the Act, and would also be exempt from donations tax.

The Ruling appears to be correct in respect of the application of the various provisions of the Act, but it is noted that no mention is made as to whether any transfer pricing adjustments would be made in terms of s31 of the Act.

The information and material published on this website is provided for general purposes only and does not constitute legal advice. We make every effort to ensure that the content is updated regularly and to offer the most current and accurate information. Please consult one of our lawyers on any specific legal problem or matter. We accept no responsibility for any loss or damage, whether direct or consequential, which may arise from reliance on the information contained in these pages. Please refer to our full terms and conditions. Copyright © 2024 Cliffe Dekker Hofmeyr. All rights reserved. For permission to reproduce an article or publication, please contact us