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Ambiguity in section 8G and its potential adverse impacts on normal capital contribution


Foreign investors investing in South Africa via a South African holding company structure, may be adversely impacted by section 8G of the Income Tax Act (ITA) due to the inability to extract their capital investment as a return of capital tax free, notwithstanding the investment being an equity contribution. Section 8G of the ITA was introduced as an anti-avoidance mechanism to counter schemes that create contributed tax capital (CTC) and avoid the payment of dividends tax to foreign shareholders.

Where a South African holding company, held by a non-resident company, issues shares to its non-resident shareholder to acquire shares in a South African target company, section 8G limits the CTC attributable to the shares issued by the holding company. This will be applicable if the target company and the non-resident company formed part of the same group of companies (i.e., 50% or more of the equity shares or voting rights) prior to the transaction.

Broadly speaking, CTC is defined, in relation to a class of shares of a company, as the consideration received (i.e. share capital and share premium) by that company for the issue of shares of that class, reduced by so much of the amount as the company has transferred for the benefit of a shareholder and which has been determined by the directors of the company to be a reduction of the CTC of the company.

The intention of section 8G is to curb stepping up the CTC of a South African holding company by transferring the shares of an existing South African company to the South African holding company in exchange for shares at market value. Section 8G, however, has a broader impact as discussed below.

The broader impact of section 8G

For an acquisition of a South African target company by a foreign company, the foreign investor can choose to acquire the target company using an offshore acquisition company directly or set up its own South African holding company for the acquisition based on their commercial requirements. Provided that the South African target company is not part of the same group of the foreign investor, section 8G would not apply.

For example, a foreign company (Foreign Co) sets up a new South African holding company (SA Holdco) and subscribes for shares in SA Holdco for R12 million to acquire a 60% shareholding in an unrelated South African target company (SA Opco) for R12 million. SA Opco has a CTC of R1 million prior to thetransaction. The CTC of SA Holdco is R12 million as this subscription of shares in SA Holdco is not restricted by section 8G.

The current wording of section 8G, however, creates challenges and undesirable results for genuine equity injections. Section 8G restricts the CTC of the South African holding company if the consideration for the non-resident’s share subscription in the South African holding company consists of, or is used, directly or indirectly, to acquire shares in another South African company that forms part of the same group of companies as the non-resident. Issues arise when additional shares in a group company is acquired by the holding company, or an additional equity contribution is made to the operating company through the holding structure.

To illustrate, with reference to the above example, assume SA Holdco intends to acquire the remaining 40% shareholding in SA Opco for R8 million. Foreign Co subscribes for additional shares in SA Holdco for R8 million, and SA Holdco uses the funds received from the share subscription to acquire the remaining 40% shareholding in SA Opco. Section 8G will apply in this scenario to restrict the CTC of SA Holdco because of the additional share subscription, as the consideration from the share subscription is used to acquire shares in SA Opco which forms part of the same group of companies as Foreign Co. The CTC of SA Holdco in this case will therefore not be increased by R8 million. Instead, it is increased by only R400 000, which is 40% of the R1 million (CTC of the SA Opco). This results in tax inefficiencies to the group of companies as only R400 000 out of the R8 million equity contribution by Foreign Co can be remitted tax free through a reduction of CTC in the future. The balance will be subject to dividends withholding tax at 20% or at a reduced rate under the applicable double tax agreement.

Another potential negative impact is on additional equity contributions to the operating company. The question is how broadly the words “indirectly” and “acquire” mean in the context of section 8G. The word “acquire” is not defined in the ITA. Generally, “acquisition” in a company can involve acquisition by purchasing existing shares or acquisition by issuance of new shares. If “acquire” in this context includes an issuance of new shares, the CTC of a South African holding company may potentially be restricted even for an equity contribution in a double layered South African holding structure.

Using the same example above, where Foreign Co now has a 100% owned SA Holdco and SA Opco. If in the future SA Opco has a capital requirement of, say, R30 million for capex expansion, and Foreign Co invests R30 million equity into SA Holdco and SA Holdco puts the R30 million as equity into SA Opco by subscribing for additional shares, there is a risk that the CTC of this additional R30 million capital contribution in SA Holdco will be restricted based on the pre-existing CTC of SA Opco, with reference to the date when SA Opco formed part of the same group of companies in relation to Foreign Co.

Companies may try to deploy other structuring or funding alternatives to mitigate the negative impacts of section 8G. However, an alternative funding structure may not be feasible if a South African subsidiary requires capital funding but has already reached its maximum debt capacity. Further, the new amendments to section 23M interest limitation may result in interest-bearing loans from foreign companies becoming less tax efficient.

Similarly, should a foreign company wish to use a double layered South African holding structure to acquire assets in an asset deal, the funding structure and timing of the issuance of shares should be carefully considered in order not to trigger potentially adverse tax consequences under section 8G.


While it is not the intention for section 8G to trigger the negative tax consequences discussed in the above-mentioned scenarios, in its current state, the section could disadvantage foreign investors who provide genuine equity capital into South Africa and are then unable to return their original capital tax free.

Without further clarity from the South African Revenue Service, or amendments to section 8G, taxpayers are advised to carefully consider the application of section 8G to any proposing funding through a South African holding company structure.

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