# Summary - Link: https://dearsouthafrica.co.za/summary/ - Published: 2019-06-13T13:36:28+02:00 - Author: dearSA [COMMENT ON THE NEW TAX LAWS](https://dearsouthafrica.co.za/taxation-laws-amendment-draft-bill-2019/) Close **Error:** Contact form not found. **I. Background** The anti-avoidance rules dealing with dividend stripping were first introduced in the Income Tax Act (the Act) in 2009. Dividend stripping normally occurs when a shareholder company that intends to disinvest in a target company avoids income tax (including capital gains tax) that would ordinarily arise on the sale of shares. This is achieved by the shareholder company ensuring that the target company declares a large dividend to it prior to the sale of shares in that target company to a prospective purchaser. This pre-sale dividend, which is exempt from Dividends Tax (in the case of a resident dividend that declares and pays a dividend to another resident company), decreases the value of shares in the target company. As a result, the shareholder company can sell the shares at a lower amount, thereby avoiding a much larger capital gains tax burden in respect of sale of shares. In 2017, amendments were made in the Act in order to strengthen the anti-avoidance rules dealing with dividend stripping. According to the 2017 changes, exempt dividends that are regarded as extra-ordinary dividends, received by a shareholder company are treated as proceeds or income subject to tax in the hands of that shareholder company, provided that the shares in respect of which extra-ordinary dividends are received, are disposed of within a period of 18 months prior to that disposal. Further, in 2018, amendments that were made in 2017 making provision for the anti- avoidance rules dealing with dividend stripping rules to override corporate re- ogarnisation rules were reversed to ensure that these 2017 amendments do not hinder legitimate re-organisation transactions. **II. Reasons for change** It has come to Government’s attention that certain taxpayers have embarked on abusive tax schemes aimed at circumventing the current anti-avoidance rules dealing with dividend stripping arrangements. These schemes involve millions of rands and have a potential of eroding the South African tax base. These latest schemes involve, for example, a substantial dividend distribution by the target company to its shareholder company combined with the issuance, by that target company, of its shares to a third party or third parties. The ultimate result is a dilution of the shareholder company’s effective interest in the shares of the target company that does not involve a disposal of those shares by the shareholder company. The shareholder company ends up, after the implementation of this arrangement, with a negligible effective interest in the shares of the target company without triggering the current anti-avoidance rules. This is because the current anti-avoidance rules are triggered when there is a disposal of shares while these new structures 5 do not result in an ultimate disposal of the shares but a dilution of the effective interest in the target company. **III. Proposal** It was proposed in Annexure C of the 2019 Budget Review that amendments should be made to the current anti-avoidance rules to curb the use of these new dividend stripping arrangements. Furthermore, given the abusive nature of these arrangements, it was proposed that the amendments should come into effect from the date of the announcement, which was on the 2019 Annual National Budget Day, (i.e. 20 February 2019). This means that the proposed amendments to the legislation on anti-avoidance rules dealing with dividend stripping will come into effect from 20 February 2019 and apply to dividend stripping schemes entered into on or after 20 February 2019.These legislative interventions will not apply in respect of dividend stripping schemes entered into before 20 February 2019. In terms of the proposed amendments the anti-avoidance dealing with dividend stripping rules will operate as follows:  The anti-avoidance rules will no longer apply only at the time when a shareholder company disposes of shares in a target company. In addition, the new anti-avoidance rules will apply to the following anti-avoidance transactions: o Shareholder companies will, for purposes of the anti-avoidance rules dealing with dividend stripping, be deemed to have disposed of and immediately reacquired its shares in the target company despite them not disposing of their shares, if the target company issues shares to another party and the market value of the shares held by the shareholder company in the target company is reduced by reason of the shares issued by the target company. o In such an instance, the shareholder company will be deemed as having disposed of a percentage of the shares it holds in the target company immediately after a share issue that results in a decrease in the value of the shares it holds. The percentage envisaged is the percentage by which the market value of those shares has been reduced by as a result of the issuance of shares. As with the current anti-avoidance provisions, the amount to be re-characterised will be so much of the tax exempt dividends that were received by or accrued to the shareholder company within 18 months of the deemed that exceed 15 per cent of the higher of the market value of the shares in the target company at the beginning of such 18-month period or market value of the shares held by the shareholder company in the target company.