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:

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 –

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:

Step 1

Step 2

Step 3 

Step 4 

Ruling by SARS 

The ruling made by SARS is as follows:

  1. No dividends tax will apply to the declaration of dividends in the various steps.
  2. 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.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)