Recent amendments were made to both the local dividend income tax exemption in section 10(1)(k)(i) of the Income Tax Act, 1962 (“the Act”) as well the foreign dividend income tax exemption in section 10B of the Act, in terms of the Taxation Laws Amendment Act, No. 31 of 2013.
In terms of these amendments, the local and foreign dividend income tax exemptions will not be available to any dividend or foreign dividend:
“received by or accrued to a person in respect of services rendered or to be rendered or in respect of or by virtue of employment or the holding of any office, other than a dividend received or accrued in respect of a restricted equity instrument as defined in section 8C held by that person or in respect of a share held by that person” (our underlining).
These amendments came into effect on 1 March 2014 and are applicable in respect of any dividends or foreign dividends received by or accrued on or after that date.
The amendments follow earlier amendments to the local dividend exemption in terms of which paragraph (dd) of the proviso to the local dividend income tax exemption in section 10(1)(k)(i) was introduced. This proviso (which remains in force) provides, broadly speaking, that a dividend in respect of a “restricted equity instrument” as contemplated in section 8C of the Act, is not exempt unless:
- the restricted equity instrument is an “equity share” other than an “equity share” that would have constituted a “hybrid equity instrument” as contemplated in section 8E(1) but for the three-year period contemplated in that definition; or
- the dividend itself constitutes an “equity instrument” or
- the restricted equity instrument constitutes an interest in a trust and, where the trust holds shares, all of the shares constitute “equity shares” other than an “equity share” that would have constituted a “hybrid equity instrument” as contemplated in section 8E(1) but for the three-year period contemplated in that definition.
The new exceptions to the local and foreign dividend exemptions as well as the previous exceptions to the local dividend exemptions in proviso (dd) thereof are aimed at taxing dividends which constitute disguised salaries. The application of the exclusions is limited to specific circumstances and should be considered having regard to the nature of the incentive scheme and the facts of each case. However, where an incentive scheme has any or a combination of the following characteristics it would be advisable to carefully consider whether any of the exclusions to the dividend or foreign dividend income tax exemptions will be applicable:
- where special classes of shares are utilised in the incentive scheme;
- where the employees hold their interests in the share incentive scheme through a trust;
- where the employees obtain dividends pursuant to a cession of the dividends to the employees or a trust;
- where there is a redemption obligation on the company issuing the shares or a corresponding right in the hands of any person to require the company issuing the shares to redeem the shares;
- where the dividend distributions are determined with reference to factors such as services rendered, employment or the holding of any office (including where the distribution of the dividends by a trust to employee beneficiaries are determined based on such factors);
- where the shares are not registered in the names of the employees.