A grey area in securities transfer tax April 2018

By HOWMERA PARAK AND RYAN MCKERROW, Published in Tax

Would there be a change in beneficial ownership, for securities transfer tax (STT) purposes, if a foreign company (MigratingCo) holding shares in a South African company (SACo) were to undergo a corporate migration or re-domiciliation from one jurisdiction to another? This is assuming that MigratingCo is formed afresh in the new jurisdiction, while it continues to operate in the same manner as before. In other words, it will have the same shareholders, management structure, employees and board members, and hold the same assets, all while continuing to operate under the same constitutional documents.

STT is levied in respect of every transfer of any security (share) issued by inter alia a company incorporated in South Africa. The term "transfer" is defined in s1 of the Securities Transfer Tax Act (25 of 2007) to exclude "any event that does not result in a change in beneficial ownership". As a result, an STT liability should, in principle, only arise to the extent that a corporate migration or re-domiciliation results in the change in "beneficial ownership" of the shares in SACo. The rationale for this would be that no transfer takes place where there is no change in beneficial ownership, in which case, an STT liability should not be owing.

The concept of "beneficial ownership" is not defined in the STT Act. In addition, there is minimal South African case authority or jurisprudence on the subject matter. Under the Income Tax Act (58 of 1962), the concept of "beneficial ownership" is important within the scope of withholding taxes. In the context of dividends, a "beneficial owner" is defined as "the person entitled to the benefit of the dividend attaching to the share".

On the topic of beneficial ownership in the context of dividends tax, National Treasury has stated that "a shareholder definition encompasses both the share register and beneficial ownership which may lead to a misunderstanding since the person named in the share register is not necessarily the beneficial owner of the share".

To this extent, the current South African authority on the concept of "beneficial ownership" demonstrates that National Treasury is of the view that a "beneficial owner" in the context of shares is the person who holds the right to the benefits derived from the share, and not necessarily the person who bears legal title to the share, in other words, the person reflected on the share registry. It is thus only logical that where the legislator refers to "beneficial ownership" instead of "ownership", one is required to disregard the holder of the asset in question for legal or regulatory purposes and, instead, consider who it is that, in substance, derives the benefit, which boils down to a pecuniary benefit, from the asset. This view is consistent with international jurisprudence on the topic of beneficial ownership.

In applying the interpretation of the concept of "beneficial ownership" to STT, it is submitted that the STT Act contemplates the change in "beneficial ownership" where the shares which are transferred are transmitted from one owner to another, that is, the ownership of the shares in substance changes hands.

Foreign corporate migrations or re-domiciliations take various forms. Certain jurisdictions have a specific process (while others don't) and
require a form of corporate restructure such as a merger to take place. This process usually results in the issue of a new share certificate by
the SA company to the re-domiciled entity, and this share certificate will, for exchange control purposes, require a fresh "non-resident" endorsement from an authorised dealer of the South African Reserve Bank. Notwithstanding MigratingCo existing under a varied
juristic form, the corporate migration or re-domiciliation will result in it continuing to exist in the same manner from all substantive standpoints – economic, voting as well as corporate and business structure. As such, an STT liability should not arise.

The South African Revenue Service (SARS) might take a different view in the case of a corporate restructuring process required to give rise to the migration or redomiciliation. Such a process requires steps to be implemented which satisfy SARS that the transaction warrants an STT liability; particularly since the concept of beneficial ownership for STT is still a grey area. Careful consideration is, therefore, required for corporate migration or re-domiciliation transactions, where the foreign company holds shares in an SA company, to ascertain whether it will trigger an STT liability.

Parak is a Senior Associate, Tax, and McKerrow a Candidate Attorney, Baker McKenzie (South Africa).