Amendments to provisions on third-party backed shares

Both sections 8E and 8EA of the ITA are anti-avoidance provisions which effectively deem any dividends received on certain instruments to be income in the hands of the recipient unless, under certain circumstances, the shares were issued for or applied for a “qualifying purpose”.

21 Feb 2024 3 min read Special Edition Budget Speech Alert 2024 Article

Section 8EA is specifically aimed at “third-party backed shares” where, essentially, the shares are secured by a third party. In this instance the holder of the share has an enforcement right against any person other than the issuer to, inter alia, acquire that share from the holder or make any payment in respect of that share in terms of a guarantee, indemnity or similar arrangement, as a result of any amount of any specified dividend, foreign dividend, return of capital or foreign return of capital attributable to that share not being received by, or accruing to, the holder of the share.

Section 8EA, however, does not apply if the funds derived from the issue of the share have been used for a “qualifying purpose”. Although there are four categories under the definition of “qualifying purpose”, one of the permitted purposes is the direct or indirect acquisition of an equity share by any person in an operating company at the time of the receipt or accrual of any dividend or foreign dividend in respect of that share. It is only if the proceeds from the issue of the shares do not fall within any of these qualifying categories, that the dividends on these shares will be classified as income.

The Budget has tabled three proposals in respect of section 8EA:

  1. The “enforcement right” encompasses a right of the holder of a share, or any connected person in relation to that holder, to enforce the performance by another person in respect of that share. It is recognised that the definition of a “third-party backed share” does not clearly reflect the intent that either a holder or a connected person to that holder could hold that enforcement right. The definition of a “third-party backed share” is therefore to be amended to address this anomaly.
  2. In 2023, tax amendments were made to clarify the ownership requirement for equity shares in the operating company acquired by the person receiving dividends or foreign dividends, with certain exclusions. These exclusions include a provision that the ownership requirement will not apply if that equity share was a listed share, which was substituted for another listed share in terms of an arrangement that is announced and released as a corporate action on a South African regulated stock exchange. This ownership requirement exclusion will now be extended to include corporate actions relating to listed share substitutions on a recognised exchange in a country other than South Africa.
  3. The ownership requirement exclusions will apply if the equity shares in the operating company are sold, and the proceeds from the sale are used to redeem the preference share within 90 days. It is recognised that further consideration is required as to whether settling dividends, foreign dividends, or accrued interest from the preference share payable also falls within the scope of allowable redemption. In this regard the proposal suggests amending the legislation to include the settlement of any such amounts in respect of the redemption of a preference share.

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