n Business Tax and Company Law Quarterly - Issuing shares in exchange for a negotiable instrument or for future services - the tax dimension

Volume 3, Issue 3
  • ISSN : 2219-1585


Prior to the introduction of the Companies Act of 2008 ('the Act'), shares had to be fully paid up before they could be issued. Thus, it was not possible to acquire shares on credit or for the performance of future services. However, with the implementation of the Act it is now possible for a company to issue shares where the consideration for the shares is in the form of an instrument such that the value of the instrument will only be realised at a later date, or in the form of an agreement for future services, future benefits or future payment by the subscribing party. While the company is required to immediately issue shares in these circumstances, the shares are, however, required to be transferred to a third party to be held in trust for later transfer thereof to the subscribing party in accordance with a trust agreement.

While the Act is clear as to the treatment of the voting and appraisal rights attaching to the shares that are held in trust (they may not be exercised as long as the shares are held in trust), the treatment of pre-emptive rights associated with the shares and dividend distributions is not as clear. While the Act prescribes that the pre-emptive rights may only be exercised, and dividend distributions must be paid to or credited to the subscribing party, to the extent that the instrument is negotiable or the subscribing party has fulfilled its obligations under the agreement ('the default position'), it is silent as regards the position where the instrument is not yet negotiable or the subscribing party has not yet fulfilled its obligations under the agreement. In addition, the default position is subject to the terms of the trust agreement, as the default position applies 'except to the extent that a trust agreement ... provides otherwise'. It follows that the default position may be overridden by the trust agreement.
The treatment of dividend distributions made in respect of shares held in trust in these circumstances gives rise to dividends tax implications, and it is these implications that are discussed in this article.

Loading full text...

Full text loading...


Article metrics loading...


This is a required field
Please enter a valid email address
Approval was a Success
Invalid data
An Error Occurred
Approval was partially successful, following selected items could not be processed due to error