Bernard du Plessis and Ana-Celia Mendes, Edward Nathan Sonnenbergs Inc. Who is liable.

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1 Tax on Transactions 2009/10 Country Q&A South Africa South Africa Bernard du Plessis and Ana-Celia Mendes, Edward Nathan Sonnenbergs Inc Tax authorities 1. What are the main authorities responsible for enforcing taxes on corporate transactions in your jurisdiction? The South African Revenue Service Act, 34 of 1997 provides that the South African Revenue Service (SARS) is responsible for enforcing the efficient and effective collection of revenue in South Africa (SA), including taxes on corporate transactions. See box, The tax authority. 2. Is it possible to apply for tax clearances or obtain guidance from the tax authorities before completing a corporate transaction? If yes, provide brief details, including whether clearance or guidance is binding. The SA Income Tax Act, 58 of 1962 (ITA) provides for the issuing of three basic types of rulings by the advance tax rulings division of SARS: Binding general rulings. These are initiated by SARS on topics of general interest. They may concern the interpretation of the ITA or its application to a particular set of circumstances or transactions. Binding general rulings are binding on SARS and may be cited by SARS or any person in any proceedings before SARS or a court. Binding class rulings. These are designed to give a taxpayer certainty when entering into a transaction. Binding class rulings are binding on SARS and can only be cited in proceedings involving the class of taxpayer that applied for and obtained the ruling. Binding private rulings. These provide guidance on how SARS interprets and applies tax law to specific transactions. Binding private rulings are binding on SARS and can only be cited in proceedings involving the party that applied for and obtained the ruling. May be withdrawn or modified under various specified circumstances (in particular, a change of law). Are relevant to income tax, value added tax (VAT), transfer duty and securities transfer tax (STT). Advance rulings are not given on: certain sections of the ITA; the market value of an asset; other taxes (for example, customs and excise). It is not mandatory for taxpayers to apply for a ruling from SARS. Any person (a natural person, company, trust, estate, foreign individual, foreign company or foreign trust) can apply for a ruling. If an applicant fails to disclose material information to SARS, the ruling is rendered void from the outset. SARS charges a fee to the taxpayer for this service. SARS can also issue non-binding private opinions, but these do not have any binding effect on SARS. These non-binding private opinions cannot be cited in proceedings before SARS or a court, other than by the person who requested it. Main taxes on corporate transactions 3. What are the main transfer taxes and/or notaries fees potentially payable on corporate transactions? In relation to each tax/fee identified, explain briefly: Its key characteristics. What triggers it. Who is liable. The applicable rate(s). These rulings: Are issued to taxpayers. Only apply to transactions that the taxpayer implements. Are valid for a specific period and are binding on SARS, but not on taxpayers. STT The Securities Transfer Tax Act, 25 of 2007 and the Securities Transfer Tax Administration Act, 26 of 2007 govern STT. This tax is levied at a rate of 0.25% on the taxable amount of the transfer of every security issued by a company in SA or a company incorporated outside of SA and listed on an exchange in SA, subject to certain exemptions. CROSS-BORDER HANDBOOKS 97 This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

2 Country Q&A South Africa Tax on Transactions 2009/10 Transfer duty Transfer duty is imposed on transfers of ownership of immovable property from a person who is not VAT registered, and is payable by the person who acquires the property. The duty is imposed as a percentage on the higher of either: The purchase price of the property being transferred (for companies this is 8% of the consideration). The fair market value of the property. receive it. Essentially it is a tax on the profits of the company declaring a dividend. The effect of STC is that if a company distributes all its after-tax earnings as a dividend, an effective corporate tax rate of 34.54% (that is, taking into account the 28% company tax rate) applies. This does not apply to gold mining companies, which are taxed on a formula basis. In the second half of 2010, it is envisaged that a dividend withholding tax will replace STC (see Question 35). Capital gains tax Donations tax Donations tax is levied on donations made by SA residents at the rate of 20%. However, certain donations (for example, donations between spouses and donations within groups of companies) are exempt. Certain disposals of assets for an inadequate consideration (typically below market value) may be deemed to be a donation. Donations tax is payable by the donor. If the donor fails to pay the tax within three months from the date on which the donation takes effect, the donor and the donee become jointly and severally liable for the tax. 4. What are the main corporate and/or capital gains taxes potentially payable on corporate transactions? In relation to each tax identified, explain briefly: Its key characteristics. What triggers it. Who is liable. The applicable rate(s). Capital gains tax is payable on the disposal of an asset held by a taxpayer on capital account. An asset is property of whatever nature (movable or immovable), including rights or interests of whatever nature to or in such property, tangible or intangible assets, excluding currency but including any coin made mainly from gold or platinum. SA-resident companies are taxed on their worldwide capital gains. Only half of taxable capital gains are added to the taxable income of a company, which is then taxed at the company s tax rate (28% for most companies). Therefore, the effective rate of capital gains tax for companies is 14%. 5. What are the main value added and/or sales taxes potentially payable on corporate transactions? In relation to each tax identified, explain briefly: Its key characteristics. What triggers it. Who is liable. The applicable rate(s). Income tax Income tax is levied on the taxable income (business profits less business-related expenses) of a company, which arises from the company s business activities. SA-resident companies are subject to income tax on their worldwide income at a fixed rate of 28%, but lower rates may apply if the gross income of the company is less than ZAR14 million (about US$1.4 million) and qualifies as a small business corporation. A company is resident if it is incorporated, established or formed in SA, or if it has its place of effective management in SA. Secondary tax on companies (STC) STC is levied on companies, at a rate of 10% of the amount by which the dividend declared by the company exceeds the dividends received by the company (other than certain dividends such as foreign dividends) during the relevant dividend cycle (the period starting on the day after the previous dividend cycle, and ending on the day the dividend is declared). STC is not a withholding tax on dividends. It is paid by the company that declares the dividend and not by the shareholders that VAT A person who carries on an enterprise and makes taxable supplies in excess of ZAR1 million (about US$99,325) per year must register as a VAT vendor in SA. VAT is levied by vendors on: The supply of goods and services (widely defined) in SA. The importation of goods and certain services into SA. The applicable VAT rates are 0% and 14%. The imposition of 14% is subject to certain exemptions, exceptions, deductions and adjustments. The application of 0% generally applies to: A supply by any vendor of goods that are exported. The sale of gold within SA. The supply of a business as a going concern between vendors. Certain services supplied to a person who is not SA-resident. 98 CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

3 Tax on Transactions 2009/10 Country Q&A South Africa International transport services. Certain basic foodstuffs. The imposition of 0% in these instances is also subject to certain conditions. As zero-rated supplies are taxable supplies, albeit at the zero-rate, vendors making zero-rated supplies are entitled to claim VAT input credits, unless prohibited, on supplies being made to these vendors. Certain supplies are exempt from VAT. These supplies include: Excise duty Excise duty is paid on specific imported goods (including alcohol, cigarettes and mineral water), and on certain locally produced goods. The rates depend on the particular commodity and its tariff. There are certain concessions based on agreements with other African territories, under which goods are subject to special rates of duty or are duty free if produced, manufactured or imported in those African countries. Concessions Educational services. Certain financial services. Residential accommodation. Local road and rail passenger transportation. Entities that only make exempt supplies are not entitled to claim VAT input credits on the supplies made to them. 6. Are any other taxes potentially payable on corporate transactions? In relation to each tax identified, explain briefly: Its key characteristics. What triggers it. Who is liable. The applicable rate(s). SA is a party to the World Trade Organisation (WTO) and has entered into agreements with EU countries. These agreements contain a number of concessions designed to encourage trade. The Coega Development Corporation operates the Coega industrial development zone, which is a phased development around industry clusters with secure customs areas dedicated to exportoriented manufacturing companies. There are tax concessions for business activities within the zone, subject to approval, which attract foreign and local investment in manufacturing industries. 7. In what circumstances will the taxes identified in Questions 3 to 6 be applicable to foreign companies (in other words, what presence is required to give rise to tax liability)? A non-resident company (a company incorporated, formed or established outside of SA and which does not have its place of effective management in SA) is subject to income tax in SA on amounts that are sourced or deemed to be sourced in SA. Under SA case law, the determination of the source of income involves a two-stage enquiry: Customs duty The Customs and Excise Act, 91 of 1964 provides the legislative framework for Customs and Excise in SA. The Customs Act is accompanied by schedules, which contain the tariff headings and applicable duties for goods that are imported into SA. SA is a member of the Southern African Customs Union (SACU) which comprises Botswana, Lesotho, Namibia and Swaziland. There is free movement of goods within the SACU. The schedules to the Customs Act contain the applicable rates of duty per item. The applicable customs duties, if any, must be paid when the goods are entered for home consumption, that is, for use in SACU. The rate of duty is dependent on the tariff classification (description) of the goods and duty is usually payable on the value (customs value) or the volume or quantity of the goods imported. Although the Customs and Excise Act makes provision for the imposition of export duty, no export duties have been imposed in SA. The originating cause of the income being earned must be determined. If that originating cause is located in SA, the income is deemed to be sourced in SA. The ITA also contains certain deemed source rules for certain types of income such as interest. A non-resident earning SA-sourced income may escape SA income tax on such income if a double tax agreement (DTA) applies, for example, if the non-resident does not have a permanent establishment (PE) in SA to which income in the form of business profits is attributable. SA has concluded DTAs with 67 countries, including the US and the UK. Non-resident companies are subject to income tax at a rate of 33%. There is no further tax when the branch or agency of a non-resident company repatriates its after-tax profits to its foreign head office. Non-resident companies are also not subject to STC. A non-resident company may be liable for SA VAT if that company carries on an enterprise in SA or partly in SA in the course of which taxable supplies exceeding ZAR1 million (about US$99,325) per year are or will be made. A non-resident company may be liable for SA VAT irrespective of whether or not it has a fixed or permanent place of business in SA. CROSS-BORDER HANDBOOKS 99 This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

4 Country Q&A South Africa Tax on Transactions 2009/10 Non-resident companies are only taxed on capital gains arising from the disposal of: Immovable property situated in SA. Share acquisitions and disposals 9. What taxes are potentially payable on a share acquisition/ share disposal? Interests in immovable property situated in SA. Assets of a PE situated in SA. The tax is levied at an effective rate of 16.5%. Non-residents may be liable for STT in respect of shares acquired by them in SA companies. Dividends 8. Is there a requirement to withhold tax on dividends or other distributions? If Withholding tax Withholding tax in SA is payable on: Royalty payments made to non-resident individuals and companies not carrying on business in SA. The rate is 12%, but this may be reduced by an applicable DTA. Payments made to non-resident sellers in relation to immovable property situated in SA and interests in immovable property situated in SA. Different withholding tax rates apply: 7.5% of the amount payable if the seller is a company; 5% of the amount payable if the seller is a natural person; 10% of the amount payable if the seller is a trust. STT The transfer of any qualifying share in a company or a member s interest in a close corporation is subject to STT at a rate of 0.25%. STT is levied on the taxable amount of a security. The taxable amount of a listed security is the greater of the consideration for the security declared by the buyer or the closing price of that security. The taxable amount of an unlisted security is the greater of the consideration given for the acquisition of the security or the market value of the unlisted security. The liability for tax in respect of the transfer of listed securities generally lies with the party facilitating the transfer. The liability for the transfer of an unlisted security generally lies with the unlisted company itself. However, both the party facilitating the transfer and the unlisted company can recover the STT from the buyer of the security. VAT Where a company s shares are disposed of the sale is exempt from VAT. However, if the company s assets mainly consist of residential immovable property, the acquirer may be required to pay transfer duty on the purchase consideration. Capital gains tax The disposal of shares in a land-rich company by a non-resident may constitute the disposal of interest in immovable property, which is subject to SA capital gains tax. 10. Are any exemptions or reliefs available to the liable party? If Amounts paid to foreign sportspersons and entertainers at a rate of 15%. Currently, there is no withholding tax imposed on dividends paid by a SA company to a non-resident shareholder. STC is levied at a rate of 10% of the net amount of any dividend declared by a SA company. However, in 2007 it was announced that STC would be phased out and replaced with a dividend withholding tax (see Question 35). It is expected that during the second half of 2010, STC will be replaced with a 10% dividend tax to be levied on shareholders, but collected through a withholding tax at company level. SAresident companies will be exempt from paying the withholding tax on dividends received. Shareholders who are natural persons, trusts, and any non-residents will be subject to the dividend withholding tax. The rate of the dividend withholding tax may be reduced to 5% if so provided for by an applicable DTA (see Question 35). STT There are a number of exemptions from STT, including where: The transfer of a security does not result in a change in beneficial ownership. The liability for STT is less than ZAR100 (about US$9.93) in respect of the transfer of all securities during a month. Transfer duty There are no exemptions from transfer duty. Capital gains tax The capital gains provision of an applicable DTA may provide relief from SA capital gains tax levied on the transfer of shares in a land-rich company. 100 CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

5 Tax on Transactions 2009/10 Country Q&A South Africa 11. Please set out the tax advantages and disadvantages of a share acquisition for the buyer. Advantages The purchase of a company s shares means the company s existing infrastructure, facilities and low-interest loans can be maintained, together with stock exchange listings, licences and service agreements. Subject to anti-avoidance provisions, assessed losses remain in the company, to be set off against future income. Disadvantages There is a risk of inheriting contingent liabilities. The buyer may have to scrutinise the previous income tax returns of the relevant company to establish any contingent liability for tax evasion and avoidance. SARS has three years to re-open assessments for underpaid taxes, unless there was fraud or misrepresentation, in which case there is no limitation period. In addition, any interest incurred on funds borrowed for the purpose of acquiring shares is generally not deductible for income tax purposes. 12. Please set out the tax advantages and disadvantages of a share disposal for the seller. Advantages Asset acquisitions and disposals 14. What taxes are potentially payable on an asset acquisition/asset disposal? Where assets are purchased from or disposed of by vendors within SA, VAT of 14% is payable by the seller. If no VAT is payable on, for example, the acquisition of immovable property for residential purposes, the sale price will be subject to transfer duty in the hands of the buyer. The transfer of assets as part of a business as a going concern qualify for VAT at the zero rate if both the buyer and seller are VAT vendors and certain other requirements are met. However, if the assets are applied partly for making taxable supplies for VAT and partly for another purpose, the purchaser must pay VAT on the non-taxable portion. The acquisition of other assets is generally not subject to tax in the hands of the buyer. However, the buyer may be entitled to claim capital allowances in respect of the assets acquired. Capital gains tax is payable by the seller on any gain on the disposal of a capital asset, where the proceeds of the sale exceed the base cost of the asset. 15. Are any exemptions or reliefs available to the liable party? If The seller is only liable for capital gains tax on the disposal, assuming that the shares are held on capital account. In the case of a sale of business by the company, the company would be liable for capital gains tax and STC on the subsequent distribution of the gain as a dividend. Disadvantages The seller may be required to provide tax indemnities to the buyer, but will have no control over how tax queries by SARS are dealt with by the buyer. If the disposal of shares results in a capital loss, the seller can only set off the loss against future capital gains. 13. What transaction structures (if any) are commonly used to To overcome the disadvantage that interest incurred on loans to acquire shares is generally not deductible for income tax purposes in SA, debt-push-down structures are often used. However, in view of recent anti-avoidance amendments to the ITA, these debt-push-down structures now have limited application. VAT Where VAT is payable on assets acquired by a vendor to be used for taxable purposes, the VAT incurred may be claimed as an input credit. If the assets are transferred between two VAT registered vendors in terms of the corporate reorganisation provisions of the ITA (see Question 26), then no VAT is payable on the transfer. Capital gains tax There are provisions that entitle a taxpayer to defer or rollover the payment of capital gains tax on transfers of assets in various transactions. They allow certain capital gains or losses, subject to certain requirements, to be rolled over, including where: The capital gain arises on the expropriation (that is, dispossessing an owner of his property or rights for a public purpose), loss or destruction of an asset (other than a financial instrument). A person disposes of an asset to his spouse (the capital gain is deferred until the spouse disposes of it). There is a reinvestment in a replacement asset. To qualify for deferral of the gain in the case of replacement assets, the taxpayer must prove all the following to SARS: An amount equal to the proceeds from the disposal of the original asset has, or will be, used to acquire a replacement asset similar to the original asset. CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

6 Country Q&A South Africa Tax on Transactions 2009/10 A contract to acquire the replacement asset has, or will be, concluded within a year of the disposal of the original asset. The replacement has, or will be, brought into use within three years of disposal of the original asset. 16. Please set out the tax advantages and disadvantages of an asset acquisition for the buyer. Advantages The buyer is generally entitled to an income tax deduction for any loans to buy the assets. The buyer does not take the risk of contingent liabilities in the selling company. Legal mergers 19. What taxes are potentially payable on a legal merger? SA law does not provide for a legal merger. Mergers and acquisitions are generally achieved through the combination of the sale of businesses and subsequent liquidation of companies in various forms. The sale of a business attracts capital gains tax, income tax recoupments, and possibly VAT, in the hands of the seller. The liquidation of a company will also potentially attract capital gains tax and STC in the hands of the liquidating company. It is, however, possible to structure such transactions so that they qualify for relief in terms of the corporate restructuring rules (see Question 26). Disadvantages For the buyer, the purchase of the assets means that licences, loans and other agreements have to be re-negotiated, perhaps on less favourable terms. In addition, if the buyer purchased assets from an assessed loss company, the assessed loss cannot be transferred to the buyer s business. 17. Please set out the tax advantages and disadvantages of an asset disposal for the seller. 20. Are any exemptions or reliefs available to the liable party? If The corporate restructuring rules provide relief for mergers or similar schemes (see Question 26). 21. What transaction structures (if any) are commonly used to Advantages Due to the additional costs for the seller and the tax advantages for the buyer, the sale of assets in a company as opposed to the sale of the shares in the company may allow the seller to negotiate a higher selling price. Disadvantages If the seller previously claimed depreciation or wear and tear allowances on the assets disposed of and the amount is subsequently recovered or recouped on the sale, the amount falls into the income of the seller. The seller is also subject to capital gains tax on the disposal. The rate of capital gains tax is higher in the case of a company selling its assets than in the case of an individual selling his shares in a company. The subsequent distribution of the capital gain as a dividend by the selling company also attracts STC. If the company is liquidated or wound up after the sale, there will be additional legal costs. 18. What transaction structures (if any) are commonly used to The corporate restructuring rules provide relief for mergers or similar schemes (see Question 26). Joint ventures 22. What taxes are potentially payable on establishing a joint venture company (JVC)? The taxes payable by a joint venture depend on how it is established. A joint venture can be conducted through a company, the share capital of which is held by the joint venture partners. In such a case, the joint venture company is subject to income tax at the normal rate of 28% (see Question 4, Income tax). There is no STT on the issue of shares (see Question 3, STT). However, if a joint venture is created through a partnership, it is not regarded as a legal entity. Each partner is separately and individually liable for tax on its share of the partnership profits. For VAT purposes, however, the partnership or joint venture is regarded as a separate enterprise. It must be registered separately as a vendor, and account separately for VAT on the income and expenses of the partnership or joint venture. As mentioned above, debt-push-down structures are often used to achieve tax advantages for the buyer (see Question 13). However, such planning must be carefully monitored, as SARS can disregard a transaction that has tax avoidance as its main purpose. 23. Are any exemptions or reliefs available to the liable party? If Relief may be available under a DTA in certain circumstances. 102 CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

7 Tax on Transactions 2009/10 Country Q&A South Africa 24. What transaction structures (if any) are commonly used to The choice of joint venture vehicle depends on a variety of different factors, including legal implications, commercial objectives and tax. The choice is usually between incorporating a company (offering limited liability) and creating a partnership (see Question 22) offering fiscal transparency. The buyer company must hold an asset as a capital asset if the seller company held it as a capital asset, and it must hold it as trading stock if the seller company held it as trading stock. The seller company is deemed to dispose of the capital asset for an amount equal to its base cost on the date of the disposal. The buyer company is deemed to acquire it on the same date that the seller company acquired it, at the same base cost. The acquisition of property by a company in an intra-group transaction is exempt from transfer duty, donations tax and STT (see Question 3). Company reorganisations 25. What taxes are potentially payable on a company reorganisation? Typically, a company restructuring may give rise to: Capital gains tax (see Question 4, Capital gains tax). STT (see Question 3, STT). Donations tax (see Question 3, Donations tax). STC (see Question 4). VAT (see Question 5). However, the corporate restructuring rules (see Question 26) provide for varying tax relief for transactions between group companies or between shareholders (usually founding shareholders) and their company. They are based on the principle that if the group or shareholders have retained a substantial interest in the assets transferred, it is appropriate to allow the tax-free transfer of assets. 26. Are any exemptions or reliefs available to the liable party? If Corporate restructuring rules provide tax concessions for several different types of transactions. However, there are a number of requirements that must be met before the tax concessions apply. The corporate restructuring rules are briefly described below. Intra-group transaction An intra-group transaction occurs where any asset is disposed of by a company (seller company) to another company (buyer company), and both companies are SA tax residents and form part of the same group of companies on the date of the intra-group transaction. A group of companies means a controlling company and one or more other companies that are controlled by it. A controlling company holds shares that are at least 70% of the total equity share capital of another resident company (the controlled company). Where a transaction qualifies as an intra-group transaction, the buyer company assumes the liabilities (or steps into the shoes ) of the seller company for tax purposes. The buyer company can continue to claim the allowances on any allowance assets transferred. An allowance asset is essentially a capital asset in respect of which a deduction or allowance is available under the ITA. An example of an allowance asset is a capital asset such as machinery or plant used by the seller company for the purposes of its trade. If the seller company claimed a depreciation allowance on the asset, the buyer company can continue to claim the depreciation allowance on the same basis as the seller company. The rollover relief provisions apply automatically to an intra-group transaction unless the seller company and the buyer company jointly elect that rollover relief should not apply. Asset-for-share transaction An asset-for-share transaction occurs where a person other than a trust (seller) transfers an asset to a resident company (buyer company), in exchange for equity shares in the buyer company. Typically, this would trigger capital gains tax, and the recoupment of allowances, as the transfer is a disposal (see Question 4, Capital gains tax). However, the disposal is deemed to take place at tax value to the seller, and the buyer company is deemed to have acquired the asset on the same date and for the same cost as the seller acquired it, that is, the buyer steps into the shoes of the seller for tax purposes. Amalgamation transaction An amalgamation transaction occurs where a company (amalgamated company) disposes of all its assets to a resident company, by an amalgamation, conversion or merger, and the existence of the amalgamated company is terminated. Typically, this is a liquidation with a dividend distribution triggering capital gains tax and STC (see Question 4). However, in a qualifying amalgamation transaction the disposal is disregarded for capital gains tax and STC purposes (see Question 20). Unbundling transaction A company distributes to its shareholders the shares it holds in another company. Typically, this is a dividend distribution triggering capital gains tax and STC (see Question 4). Provided certain conditions are met, the transfer in an unbundling transaction takes place at base cost to the transferor and no capital gains tax or STC is payable. CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

8 Country Q&A South Africa Tax on Transactions 2009/10 Liquidation transaction A liquidation transaction occurs where a company (liquidating company) distributes all its assets (other than assets used to settle any debts incurred by it in the ordinary course of its trade) to its holding company in anticipation of or during its liquidation, winding-up or deregistration. The holding company must, on the date of the disposal, be a resident company holding at least 70% of the equity shares of the liquidating company. The liquidating company is deemed to dispose of its assets at base cost and does not therefore realise a capital gain. The holding company is deemed to acquire the assets at the same time and for the same cost as the liquidating company acquired the assets. The final liquidation of a company also triggers a disposal of the shares in the company for the shareholders for capital gains tax purposes. Before the final liquidation of a company, SARS also scrutinises the tax affairs of the company to ensure that all taxes are fully paid. Liquidation of a company triggers a liability for VAT previously claimed as input tax on goods or services acquired, where the purchase consideration for such goods or services has not yet been paid at the time of liquidation. Share buybacks 29. What taxes are potentially payable on a share buyback? The holding company can claim the allowances on any allowance assets transferred, that is, the holding company steps into the shoes of the liquidating company for tax purposes. The holding company must disregard any capital gain or loss in respect of the disposal of the shares in the liquidating company. The rollover relief provisions on a liquidation transaction will apply automatically unless the liquidating company and the holding company jointly elect that rollover relief should not apply. VAT Where certain of the above corporate restructuring rules and requirements are met, and goods or services are supplied by a vendor to another vendor, those vendors are deemed to be one and the same person. As a result, no VAT consequences arise for either party. STC and STT A company can buy back its own shares from its shareholders, subject to liquidity and insolvency requirements. The shares are cancelled and restored to authorised but unissued share capital. The company must issue new shares, if additional shares are required. The company is liable for STC and STT when it buys back shares (see Question 4, STC and Question 3, STT). VAT payable on share buyback expenses may not qualify as an input tax deduction. 30. Are any exemptions or reliefs available to the liable party? If 27. What transaction structures (if any) are commonly used to Where possible, transactions are specifically structured so that they fall within the ambit of the above corporate restructuring rules (see Question 26). Restructuring and insolvency 28. What are the key tax implications of the business insolvency and restructuring procedures in your jurisdiction? To the extent that a company enters into a compromise with its creditors, it may be subject to income tax on debts that it is not required to repay. The company may also forfeit all or a portion of its assessed loss. A creditor of a company may, depending on its specific circumstances, be entitled to an income tax or capital gains tax loss for any amounts not recovered from the liquidating company. The distribution of assets by a company in the course of or in anticipation of liquidation triggers capital gains tax and STC in the hands of the liquidating company. There is no specific exemption or relief available to the liable party. 31. What transaction structures (if any) are commonly used to There are no structures to minimise the tax burden on share buybacks. A company intending to undertake a share buyback must comply with the company law provisions before carrying out the share buyback. Private equity financed transactions: MBOs 32. What taxes are potentially payable on a management buyout (MBO)? Generally, income tax is payable on recoupments (see Question 4, Income tax). A recoupment arises when a tax deduction is claimed for an asset and the amount is subsequently recovered or recouped on the sale of that asset. This may arise on the sale of assets in an MBO. In addition, capital gains tax may be payable on the disposal of capital assets (see Question 4, Capital gains tax). 104 CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

9 Tax on Transactions 2009/10 Country Q&A South Africa 33. Are any exemptions or reliefs available to the liable party? If Transactions can be structured to minimise the impact of capital gains tax, STC and recoupments, for example, by utilising the corporate restructuring rules where applicable (see Question 26). 34. What transaction structures (if any) are commonly used to The tax authority South African Revenue Service (SARS) Contact details. Head Office 299 Bronkhorst Street Nieuw Muckleneuck Pretoria Private Bag X923 or PO Box 402, Pretoria 0001 South Africa T F W It may be preferable to leverage a new company with debt to acquire the assets of the business as a going concern. In this way, the transfer of the assets generally qualifies for VAT at the zero rate, and interest deductibility is ensured on the loan funding to acquire the business. Reform 35. Please summarise any proposals for reform that will impact on the taxation of corporate transactions. STC STC is due to be phased out and replaced with a new 10% dividend withholding tax (see Question 4, STC). It is expected that the dividend withholding tax will be introduced in the latter part of The following legal principles will apply in relation to this new tax: The formal legal liability for the dividend tax will be on the shareholder receiving the dividend. The company declaring the dividend will be required to withhold the dividend tax. The dividend withholding tax will be a final tax payable in respect of dividends declared to the ultimate shareholders of a SA company. Cascading relief will be provided, that is, where dividends are declared through more than one level of SA-resident companies in a chain, they will only be taxed when the profits reach the ultimate individual or non-resident shareholders. The dividend articles of a relevant DTA may reduce the dividend withholding tax where a dividend is declared to a non-resident shareholder. However, certain DTAs are in the process of being re-negotiated so that the dividend withholding tax is not reduced to below 5%. Passive holding companies In terms of the proposed mechanics of the dividend withholding tax system, taxpayers will benefit where a dividend is declared Contact for tax clearances. No specific contact details. The taxpayer can contact any branch office of SARS. through a chain of SA-resident companies, because the withholding tax liability is generally deferred until the dividend is ultimately declared to an individual or non-resident beneficial shareholder. To ensure that SA-resident individuals do not abuse this deferral, anti-avoidance measures will apply to closely-held passive holding companies (PHCs), which are used to accumulate passive dividend income and defer the liability for dividend withholding tax. The tax treatment of a PHC will broadly be as follows: All dividends received by, or accruing to, the PHC will be subject to a tax in the PHC s hands, initially at a rate of 10%. The taxable income of a PHC will be subject to tax at a rate of 40%. Dividends paid by a PHC will not be subject to dividend withholding tax to the extent that the dividend is declared out of dividends subject to the 10% dividend withholding tax or taxable income that is subject to tax at a rate of 40%. This calculation is done on a cumulative basis. This tax treatment of a PHC is aligned with the purpose of the legislation where the shares in a PHC are held by SA-resident individuals. The legislation defines a PHC as a company other than an excluded company where both: The passive income of the company for the year exceeds 80% of the gross income for the year of the company and the gross income of all other companies that form part of the same group of companies as the company. Five or fewer natural persons that are resident in SA, together with any connected persons in relation to those persons, at any time during the year directly or indirectly hold more than 50% of the participation rights in the company. The test to determine whether a company is a PHC must be performed annually. Environmental fiscal reform In the latest tax proposals included in the 2009 Budget Review, the SA government articulated its support of environmental policies. Current legislation already provides for three year acceler- CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

10 Country Q&A South Africa Tax on Transactions 2009/10 ated depreciation allowances for investments in renewable energy and bio fuels production. of companies as the listed company, cannot represent more than 10% of the share capital of the venture capital company. In the 2009 Budget, it was proposed that investments by companies in energy efficient equipment should qualify for an additional allowance, over and above existing allowances, of up to 50% of the cost. This allowance would apply on condition that there is documentary proof of the result in energy efficiencies after a twoor three-year period, certified by the Energy Efficiency Agency. It was further proposed that the income derived from the disposal of primary certified emission reductions (CERs) credits under the Kyoto protocol should be tax exempt or be subject to capital gains tax instead of normal income tax. Secondary CERs are to be classified as trading stock and taxed accordingly. Introduction of venture capital tax incentives To assist small and medium-sized businesses and junior mining exploration companies obtain equity finance, a tax incentive was recently passed into tax law for investors investing through venture capital companies. The venture capital company is intended to be a marketing vehicle that will attract retail investors. It has the benefit of bringing together small investors as well as concentrating investment expertise in favour of the small business sector. Normally, when an investor purchases shares in a company, the investor is not allowed a deduction for tax purposes because the expenditure incurred is regarded as being of a capital nature. However, a deduction will be allowed for expenditure incurred when shares issued by a venture capital company are acquired by any of the following: A natural person. The minimum investment required for a venture capital company that invests in small and medium-sized entrepreneurial companies is ZAR50 million (about US$4.96 million). The minimum investment required for a venture capital company that invests in junior mining companies is ZAR250 million (about US$24.83 million). However, such investments cannot be made in a single small or medium-sized company as the venture capital company s investments must be varied. Accordingly there are specific requirements for the venture capital company s investment portfolio. As the purpose of the deduction is to encourage investment by venture capital companies in small and medium-sized enterprises and promote the growth of the economy as a whole, these requirements ensure that venture capitalists invest in start-up companies. To date, venture capital investment in small and medium-sized businesses has been relatively small in SA due to the high risk attached to such businesses. Income tax deductions allowed for nature conservation In an attempt to encourage biodiversity conservation by private landowners, an income tax deduction is allowed for expenditure actually incurred by a landowner to conserve or maintain the landowner s land. Where a taxpayer incurs expenditure to conserve and maintain land, the expenditure is deductible from the taxable income of the taxpayer or is regarded as a tax deductible donation to the government. Where land owned by a taxpayer is declared a national park or nature reserve, a percentage of the cost of acquiring the land is deemed to be a tax deductible donation made to the government. A listed company. A controlled group company in relation to a listed company. The allowed deduction for a natural person is limited to ZAR750,000 (about US$74,494) per year. A listed company is not restricted in terms of the monetary amount it may deduct in respect of the acquisition of shares in the venture capital company. However, the total amount of the shares acquired by the listed company, together with any other company forming part of the same group CONtributor details Bernard du Plessis and Ana-Celia Mendes Edward Nathan Sonnenbergs Inc T F E bduplessis@ens.co.za amendes@ens.co.za W The first place I turn to when I need a quick, well researched and reasoned answer to a corporate legal question. Dan Fitz, General Counsel and Company Secretary, Misys plc. Law Department is the essential know-how service for in-house lawyers. Never miss an important development and confidently advise your business on law and its practical implications CROSS-BORDER HANDBOOKS This chapter was first published in the Cross-border Tax on Transactions Handbook 2009/10 and is reproduced with the permission of the publisher, Practical Law Company.

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