Share Re-Purchase And Profit Extraction Transactions

The favourable tax treatment afforded to dividends in contrast to other forms of income (including capital gains subject to capital gains tax) in terms of South African tax law has resulted in many opportunities for tax arbitrage especially where one is dealing with the sale of shares.

Given that dividends are generally exempt from tax in terms of the Income Tax Act No. 58 of 1962 (“the ITA”) and in certain instances (most notably payments by South African tax resident companies to other South African tax resident companies) exempt from dividends tax, many transactions have typically been structured to take advantage of the favourable dispensation afforded to dividends. A classic example would be for a corporate shareholder to exit its share investment in a company by means of a share repurchase transaction as opposed to the direct sale of shares. There are many commercial benefits of doing so but the tax benefit definitely cannot be ignored when one considers no tax