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New Corporate Migration Rules to deter foreign investors?

12th September 2013


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The proposed amendment contained in the Draft Taxation Laws Amendment Bill 2013 (TLAB) of paragraph 11(2)(b) of the Eighth Schedule to the Income Tax Act, 1962, was discussed in our last newsletter. This new proposal, if enacted, will make it extremely costly from a capital gains tax (CGT) perspective for corporate entities in SA to fund the acquisition of shares in a foreign company through an issue of their own shares.

The proposed amendment classifies the issue of shares by a South African company as a disposal for CGT purposes; with the deemed proceeds being equal to the market value of the foreign shares being acquired. CGT will, as result, be triggered on the acquisition of the foreign shares on a "gain" equal to the market value of the foreign shares acquired.


It is a common occurrence for both listed and unlisted South African companies to issue their own shares in exchange for the acquisition of shares in a foreign company. The draft provisions will thus make South African multinational groups less competitive by preventing them from being able to acquire existing foreign companies if some or the entire purchase price is to be paid by an issue of shares.

We are aware of many transactions where South African listed companies have acquired, for example, European or US companies in the same line of business as themselves and have paid for these foreign acquisitions at least in part through an issue of shares in the listed South African company.


These transactions have benefitted South Africa greatly in terms of significant dividend flows from abroad into the country; the transfer of knowledge and skills to South African operations; and the opening up of new markets for products manufactured in South Africa. The acquisitions would not have been possible to fund if the listed South African companies had not been able to settle a portion of the purchase price by issuing shares.

It is not always possible or financially efficient for South African companies to raise all the funding needed for such acquisitions from banks. Legitimate commercial transactions of this nature will be hit with a massive CGT liability if the proposed amendments are enacted.

The draft Explanatory Memorandum to the TLAB states that the reason for the proposed amendment is to prevent the control (i. e. shareholding) of a South African company shifting to a foreign jurisdiction free from tax. The provisions, however, are not drafted to apply only when such a shift of control occurs. Even if only a small fraction of the South African company's total shares are issued to a foreign seller of shares, the provisions will still apply.

From a policy perspective, it seems counterintuitive to make South Africa attractive as a holding company location and to pass tax legislation aimed at this objective (such as headquarter company legislation; and provisions exempting from tax foreign dividends and capital gains on the disposal of foreign companies) and to then propose CGT legislation that has the effect of preventing foreign investors from transferring foreign companies underneath a South African holding company.


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