The first draft Taxation Laws Amendment Bill, 2017 (the “2017 TLAB”) was released on 19 July 2017 for public comment (due by 18 August 2017).

Among other things, it is proposed that the current section 22B of the Income Tax Act, 1962 (the “Act”) and paragraph 43A of the Eight Schedule to the Act, be substituted with a new section 22B and paragraph 43A.

This proposal follows the announcement made in the 2017 Budget Speech on 22 February 2017 that:

“In the 2016 Budget Review, tax avoidance schemes involving share buybacks were highlighted for review. Such schemes involve a company buying back shares from its current shareholders to avoid the tax consequences of share disposals. The seller receives payment in the form of a dividend that may be exempt from normal tax and dividends tax, instead of paying tax on the sale of shares. Following the announcement in 2016, no specific countermeasures were introduced. It is therefore proposed that specific countermeasures be introduced to curb the use of share buyback schemes.”

The proposed substitution, if implemented in its present form, may re-characterise certain exempt dividends received by companies as (taxable) proceeds on the disposal of shares held by that company in another company. Specifically, these sections may apply where:

  • the shareholder company, whether alone or together with a connected person, directly or indirectly holds at least 50%, or 20% if no other person holds a majority, of the equity shares or voting rights in the company whose shares are being disposed of; and
  • the exempt dividend is received in relation to the disposal of the shares, or within a period of 18 months prior to the disposal of the shares.

These proposals will broaden the scope of existing anti-avoidance rules.

It is currently proposed that these amendments should come into operation from 19 July 2017 and apply in respect of any disposals on or after that date. It may well be that transactions contractually concluded before this date could also be affected.