By Azwinndini Magadani
The use of the word ‘indirectly’ widens the scope of the disposals of equity shares that could fall within the ambit of section 35A.
The acquisition of shares generally triggers the Security Transfer Tax (STT) payable by a company whose shares are being sold but recoverable from the purchaser. It infrequently happens that the purchase of shares is liable to tax other than STT. The withholding tax on amounts paid by the purchaser to non-resident sellers of immovable property in South Africa came into effect on 1 September 2007. This article deals with the situation where the purchaser of shares in a company will be personally liable to withhold the amount of tax in respect of the acquisition thereof.
Company A, a non-resident company, sells 30% equity shares in Company B to Company C for R3 million. Company B and Company C are both South African residents. Company B holds immovable properties for rental and the entire market value of its shares is attributable to these properties.
According to section 35A of the Income Tax Act No 58 of 1962, the purchaser of immovable property situated in South Africa must withhold amount of tax (5% to 10% of the purchase price depending on whether the seller is a natural person, company or trust) from the payment made to seller who is not a resident. The obligation to withhold the amount of tax is triggered by the disposal of an immovable property as contemplated in paragraph 2 of the Eighth Schedule to the Act by a person who is not a resident. Section 35A does not apply if the selling price does not exceed R2 million or in respect of a deposit paid in respect of the purchase of immovable property.
The immovable property is defined to include interest in immovable property situated in South Africa. The interest in movable property includes shares held in a company if:
- 80% or more of the market value of the equity shares is attributable directly or indirectly to immovable property, and
- The seller holds at least 20% of the equity shares in that company.
The shares held by Company A constitute interest in movable property and the disposal falls within the provisions of section 35A for the following reasons:
- More than 80% of the market value of Company B’s shares is attributable to
- Company A holds 30% (more than 20%) of the equity shares in Company B.
Company C, as a purchaser, will be required to withhold 10% of the amount payable to the seller (Company A, in this case). The amount withheld must be paid to the Commissioner within 14 days after the date on which that amount was so withheld. Furthermore, the purchaser must submit a return (NRO2) together with the payment to the Commissioner.
Where Company C fails to withhold the amount payable to the Commissioner, it will be personally liable for the amount that must be withheld to the extent that it knows or should reasonably have known that the seller is not a resident. In addition, the purchaser will be liable to pay interest and penalty (10%) on the amount of tax not withheld.
In conclusion, where a company enters into a transaction which involves the purchase from non-resident sellers of shares in the company directly or indirectly involved in immovable properties, regard should be had to the provision of section 35A
Azwinndini Magadani CA(SA) is a SAICA National Tax Committee member and Tax Director at SNG Grant Thornton.
This article was originally published in ASA.