BEE transactions and the impact on your tax position: An overview
Any transaction where shares change hands will influence your, or the company’s, tax position. The way the transaction for is structured for BEE purposes is key. One needs to understand the tax implications at the time of entering and exiting a deal to minimize the tax effect for all the parties involved.
As part of the ownership element of the BEE scorecard is a compliance target of firstly 25.1% black equity participation and potentially even up to 51%. Shares are traded to ensure that participation provides adequate BEE points to improve the company’s scorecard and public perception. The way shares are traded depends predominantly on your tax position as purchaser or the seller. In the case of a sale of shares there might be capital gains tax (CGT) payable by the seller, while the sale of an entire business could mean both recoupments (of income tax) and CGT. Further to this, a transaction is often structured purely from a commercial or legal perspective may not from the preferred tax perspective.
There are no specific tax incentives for BEE ownership deals, however, the change to the definition of "group of companies" from a 75% to 70% shareholding means that it is possible to make use of corporate restructuring rules in structuring BEE transactions. These rules provide for a tax-neutral transfer of assets between different companies, subject to a specific level of shareholding. Have a look at the Companies Act for provisions used in BEE deals, specifically section 43 "share-for-share" and section 42 "company formation".
The question regarding the deductibility of financing costs in structuring BEE deals also arises. One cannot deduct the interest on loan finance to acquire shares for tax purposes. However, where the company has listed shares, a third of the interest incurred can be capitalised to the base cost of the shares for CGT purposes, decreasing the potential future taxable capital gain upon disposal
Section 24B of the Income Tax Act resolves that share based payments as assets (other than shares or debt instruments) acquired in exchange for shares and are deemed to be acquired at market value. The introduction of this section also
A further method often utilised to introduce a BEE partner is the issue of new shares, the effect of which gives rise to a dilution of the existing shareholders interest in the company. An important issue is the CGT implications of a dilution. A dilution of a shareholder’s interest in a company causes a deemed disposal for CGT if the dilution constitutes a "value-shifting arrangement".
This is an arrangement in terms of which a person retains an interest in a company, but the value of his interest decreases to allow a connected person to benefit. This type of arrangement is a disposal for CGT purposes. The base cost of an asset, which is disposed of in terms of a value-shifting arrangement, is determined by way of a specific formula. If the existing shareholders and the new BEE shareholders are not connected, the value-shifting provisions would not apply.
There are clearly many ways to structure a BEE deal, the key being to do so in a manner which provides tax efficiency for all parties. This requires careful planning as each transaction is unique and tax may form a significant part of transaction costs.
Credit to SAICA and Integritax for information gathered