The Applicant and Co-applicant approached SARS to determine the income tax and donations tax consequences of a share buy-back at nominal value pursuant to a proposed cancellation agreement.
The Applicant is a resident company and the Co-applicant is a resident trust, owning 34.83% of the Applicant’s shares, and with Company A and Company B, both being resident companies, holding 44.94% and 20.23% of the shares in the Applicant respectively. All shares were issued at a total subscription price of R1.00.
The subscription prices at which shares were issued to the Co-applicant and Company B were determined by the board of directors of the Applicant and deemed adequate consideration for purposes of section 40 of the Companies Act, No. 71 of 2008 (the Companies Act).
The shares issued to the Co-applicant were issued in terms of an employee share ownership programme in accordance with the Broad-Based Black Economic Empowerment (B-BBEE) Codes of Good Practice in terms of the B-BBEE Act, No. 53 of 2003.
The Co-applicant was primarily established to provide sustainable equity-based participation in the Applicant, for the benefit of its beneficiaries; to ensure the sustainability and effective management of the Applicant; and for the Applicant to improve its BEE ownership status.
The Co-applicant has not yet appointed beneficiaries, nor has the Applicant declared a dividend since the Co-applicant and Company B became shareholders, due to the share subscription transaction involving the Co-applicant being incorrectly implemented.
The intention was that the Co-applicant should acquire and hold the shares in the Applicant in a nominee capacity only; however, due to the structure and incorrect implementation of the transaction, the Co-applicant has ended up holding its shares in the applicant as a discretionary trust and nothing more.
On this basis, the Applicant and Co-applicant propose entering into a restitution agreement which will terminate the subscriptions, returning each party to their position prior to the implementation of the transaction, resulting in its unwinding. The intention is to then implement a further share ownership plan, whereby shares will be reserved for issue to qualifying black employees. However, the Applicant will place restrictions on the vesting and transfer of these shares by the Applicant to the employees.
The restitution agreement will be effected by the Applicant repurchasing all shares held by the Co-applicant for the same consideration as at issue of the subscriptions, being R1.00. The Applicant will cancel the repurchased shares and return them to its authorised and unissued share capital in accordance with section 35(5) of the Companies Act.
This ruling is subject to the following additional conditions and assumptions:
- A resolution must be taken by the board of directors of the Applicant authorising the repurchase of all the shares held by the Co-applicant for the same consideration as at issue of the subscription, being R1.00 in aggregate. The resolution must clearly set out the proposed structure to be implemented subsequent to the share repurchase and expressly state the reasons that necessitated the such repurchase; and confirm the reduction in contributed share capital of the Applicant.
- The decision of the board of directors is to be approved via resolution of the shareholders of the Applicant.
- A resolution must be taken by the trustees of the Co-applicant authorising the repurchase of all of its shares held in the applicant for the same consideration as at issue of the subscription, being of R1.00. The resolution of the trustees must clearly set out the proposed structure to be implemented subsequent to the share repurchase and expressly state the reasons that necessitated such repurchase.
- The Applicant has 18 months from the date of the ruling to conclude, implement and give effect to the new employee share ownership, or within such further period, of which an extension may be applied for to the Advance Tax Rulings Unit of SARS.
The ruling made in connection with the proposed transaction is valid for a period of 18 months from 27 September 2019, and in terms thereof, the share repurchase by the Applicant of its shares from the Co-applicant for a consideration of R1.00 will –
- not constitute a disposal by the Applicant in terms of paragraph 11(2)(b) of the Eighth Schedule;
- constitute a disposal by the Co-applicant in terms of paragraph 11(1)(a);
- not, in the specific facts and circumstances, result in the application of paragraph 38(1) to the transaction;
- not give rise to a “dividend” as defined in section 1(1) of the ITA;
- not give rise to an inclusion in the “gross income” of the Co-applicant as defined in section 1(1);
- not give rise to a “donation” as defined in section 55(1); and
- not give rise to a deemed donation in terms of section 58(1).