The South African Income Tax Act, 1962 (the "Act") levies dividends tax of 20% on dividends paid by South African resident companies and non-resident companies (but in the latter case, only if the shares are listed in South Africa).
Where a company borrows listed shares, the lender would typically be entitled to a manufactured dividend paid by the borrower to the extent that a dividend was declared on the shares. The manufactured dividend is not regarded as a dividend as defined in the Act (whether for income tax or dividends tax purposes). This is because the manufactured dividend is paid in terms of a contractual arrangement between the lender and the borrower and not in respect of shares held by the lender in the borrower.
In order to levy dividends tax on certain manufactured dividend payments, section 64EB(2) was introduced into the Act in 2012. This section has since been amended on a number of occasions.
Currently, section 64EB(2) deems any amount paid by a borrower of a listed share or by the recipient of a listed share in terms of a collateral arrangement, to be a dividend paid by that borrower or recipient of the collateral, if the borrower or recipient of the collateral:
- is a resident company or includes the dividend in its income;
- holds the listed shares; and
- receives or accrues a dividend in respect of those shares.
If section 64EB(2) applies to a payment, then that payment is deemed to be a dividend paid by the borrower or recipient of the collateral and subject to dividends tax and the payor has a withholding obligation. If the payor incorrectly withholds (or fails to withhold) then it may be liable for the withholding tax.
In the February 2020 Budget Review, the following was stated in respect of the lending of listed shares and the transfer of listed shares as collateral:
Refining the tax treatment of transfer of collateral in securities lending arrangements
The Income Tax Act contains rules to address dividend tax avoidance transactions whereby listed shares are lent or transferred as collateral from a person that would be liable for the tax to a tax-exempt person.
The borrower or recipient of the collateral receives the exempt dividend and pays a manufactured dividend to the lender or provider of the collateral. It is proposed that the anti-avoidance rules be extended to also cover situations where additional exempt parties are involved to facilitate the avoidance transactions."
Following on from the 2020 Budget announcements made in February 2020, the 2020 draft Taxation Laws Amendment Bill ("DTLAB") was released on 31 July 2020 and proposed certain amendments to section 64EB(2) of the Act in terms of which payments are deemed to be dividends for purposes of the dividends tax.
In this regard, the draft Explanatory Memorandum to the DTLAB states that:
".it is proposed that the current provisions of section 64EB(2) of the Act be amended to adjust the anti-avoidance trigger that currently requires the person paying a manufactured dividend to a person that is subject to dividends tax, to hold a share in the company declaring the dividend. The holding of a share requirement is to be deleted."
In terms of the DTLAB it is proposed that the relevant provisions of section 64EB(2) be amended to apply where, inter alia, a person that is a resident company or a person that includes the dividend in its income:
- borrow a listed share or acquire a listed share in terms of a collateral arrangement; and
- a dividend in respect of that share or any amount determined with reference to a dividend in respect of that share is received by or accrues to that person.
If these requirements are met, then for purposes of the dividends tax provisions, any amount paid by that person (ie the borrower/collateral recipient) to that other person (ie the lender/collateral provider) not exceeding that dividend or amount determined with reference to a dividend in respect of that share will be deemed to be a dividend paid by that person for the benefit of that other person.
The proposed amendments therefore delete the current requirement that the listed share be held by the borrower/collateral recipient.
In our view, the proposed changes should not impact on a lender/collateral provider that is entitled to an exemption from dividends tax or where the amount is subject to income tax.
However, these provisions may apply to cross-border arrangements where the lender or collateral provider is not subject to income tax on the receipt of the manufactured dividend.
As such, the payor of a manufactured dividend should take note and consider whether it may have a withholding obligation and the recipient of the manufactured payment should consider if it is liable for the dividends tax or whether it may qualify for relief in terms of a double taxation agreement and what it should to in order to obtain such relief.
In terms of the DTLAB, it is proposed that the amendments come into operation on 1 January 2021 and apply in respect of amounts paid on or after that date in respect of shares that are borrowed or acquired in terms of a collateral arrangement.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.