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South Africa: Proposed relief from taxation of “dividend stripping” rules

South Africa: Proposed relief, dividend stripping rules

A proposed legislative change would revise the rules in South Africa concerning the taxation of “dividend stripping” transactions.

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Dividend stripping occurs when a seller of a company causes the company to declare a dividend prior to the sale of the company’s shares, thereby lowering the value of the shares (and the price at which they are sold), and effectively extracting part of the sale proceeds as a tax-free dividend. To address these situations, legislation in South Africa (effective 19 July 2017) imposed tax on “extra-ordinary dividends” (dividends in excess of a 15% share value threshold) that have been declared within 18 months prior to the disposal of a company’s shares. 

However, to address the perceived overreach of the 2017 amendments on the taxation of dividend stripping, a draft bill (Taxation Laws Amendment Bill (published 19 July 2018)) proposes that the dividend stripping provisions would be amended so that they no longer override transactions that qualify for corporate tax relief. 

In other words, exempt dividends received within 18 months prior to the corporate tax relief transaction, or as a result of the corporate tax relief transaction, would not be taxed as sale proceeds under the dividend stripping provisions. 

 

Read an August 2018 report [PDF 403 KB] prepared by the KPMG member firm in South Africa

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