Corporate Reorganisations: The Dividend Stripping Pitfall
Under South African corporate reorganisation rules, tax consequences are deferred and do not crystalise at the time of the transaction, but a carefully planned restructuring transaction may result in hardship due to subsequent events. A recently proposed amendment illustrates this risk.
However, the consequences of a sale of capital assets within that period are often not severe. Other than disposals that result in an equity holding below certain key levels (such as de-grouping) and in the absence of tax losses, the normal tax treatment generally applies to gains or losses on such a disposal, based on the cost that was rolled-over in terms of the corporate rules. The distinguishing feature of a disposal within 18 months, is usually that any capital gain or loss that would have arisen had the asset not been acquired under the corporate rules, is ring-fenced.
“Dividend stripping” period
Relevant shares and shareholders
Example: shares acquired by exchange
Consider a group comprising company A with a wholly owned subsidiary B. The only asset of B is a minority equity interest in C. A acquires the shares in C (new shares) from B as a liquidation dividend. This is done under the corporate rules, ie, a deferral transaction. A thus acquires the C shares (new shares) by virtue of holding the B shares (old shares). Within 18 months, A sells the new shares to a third party.
Extraordinary dividend: new rule
The extraordinary dividend on such a transaction will be the higher of:
The effect is that notwithstanding that a company that is sold may be a high value company that allows dividends extracted to remain within the 15% level, a reorganisation transaction within the prior 18 months may still result in an extraordinary dividend which will increase the proceeds upon an external sale of the shares for capital gains tax purposes.
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