In terms of the Tax Administration Act, the South African Revenue Service (“SARS”) can issue, in response to an application, Binding Private Rulings (“BPR”) and clarifies how the Commissioner would interpret and apply the provisions of the tax laws relating to a specific proposed transaction.
BPR 346 determines the income tax and dividends tax consequences of the redemption of intra-group loans by way of set-off against dividends payable. The ruling was made in connection with the interpretation and application of section 19 and section 64F(1)(a) of the Income Tax Act, dealing with debt waivers and dividends tax.
The below-mentioned companies belong to the same “group of companies” and are the parties to the ruling:
- The applicant: A private company and a tax resident in South Africa;
- Co-applicant A: A private company and a tax resident in South Africa;
- Co-applicant B: A private company and a tax resident in South Africa; and
- Co-applicant C: A private company and a tax resident in South Africa.
Description of the proposed transaction
The applicant is an investment holding company that owns all the equity shares in co-applicant A and co-applicant B. Co-applicant B holds 100% of the share capital of co-applicant C. The following loan accounts exist between the applicants –
- Loan 1 receivable by co-applicant A from the applicant;
- Loan 2 receivable by co-applicant A from co-applicant B;
- Loan 3 receivable by co-applicant C from the applicant;
- Loan 4 receivable by co-applicant C from co-applicant A; and
- Loan 5 receivable by co-applicant B from the applicant.
The loans had their origin in ongoing advances between the group companies to one another to fund day-to-day operations. None of the funds were used to fund the acquisition of assets. The group wishes to eliminate the intra-group loans as far as possible.
The steps to implement the proposed transactions are as follows:
- Co-applicant A will declare a dividend to the applicant equal to the balance of loan 1, which will be left outstanding on the loan account.
- Co-applicant A and the applicant will agree to set off the dividend payable by co-applicant A against loan 1 payable by the applicant to co-applicant A, resulting in the full settlement of both loans.
- Co-applicant C will declare a dividend to co-applicant B equal to the balance owing in respect of loan 3, which will be left outstanding on the loan account. Co-applicant C will cede loan 3 to co-applicant B in settlement of the dividend.
- Co-applicant B will cede loan 3 and loan 5 to co-applicant A in part payment of loan 2.
- Co-applicant C will declare a dividend to co-applicant B for an amount equal to the balance in respect of loan 4, which will be left outstanding on loan account. Co-applicant C will cede loan 4 to co-applicant B in settlement of the dividend.
- Loan 2 and loan 4 will be set-off against each other. The net balance will be an amount owed by co-applicant B to co-applicant A in respect of loan 2.
- Co-applicant A will declare a dividend to the applicant for an amount equal to the sum of the balances of loan 2, 3 and 5, which will be left outstanding on loan account.
- Loan 3 and loan 5 will be set off against the dividend.
- Co-applicant A will cede loan 2 to the applicant in settlement of the dividend.
Ruling by SARS
The ruling made by SARS is as follows:
- No dividends tax will apply to the declaration of dividends in the various steps.
- The redemptions of loans 1, 3 and 5 by way of the set-off arrangements in step 1 and step 4 will, in each instance, constitute a “concession or compromise”. However, the set-off arrangements will in none of those cases amount to a “debt benefit” – therefore, none of the “debt waiver” provisions applies.
SARS further held that the ruling did not cover any general or special anti-avoidance provisions in the Act, which has been a condition on which they have recently issued rulings.