1887

n Business Tax and Company Law Quarterly - Interest-free and low-interest shareholder loans

Volume 5, Issue 3
  • ISSN : 2219-1585

Abstract

It is not unusual for companies to provide their shareholders with loans at preferential rates of interest. Where these preferential rates are lower than the prescribed 'market-related interest' rate, dividends-tax implications arise where the relevant shareholder is a resident person who is not a company and who is a connected person in relation to the company (a 'qualifying shareholder'). The loan must have been made by the company to the qualifying shareholder 'by virtue of' the shares held by such shareholder. Similar dividends-tax implications arise where a company provides such a preferential loan to a resident person who is not a company and who is a connected person in relation to the qualifying shareholder (a 'connected qualifying shareholder'). In effect, the company is treated as having paid a dividend to the relevant qualifying shareholder equal to the greater of the prevailing 'market-related interest' in respect of the debt, less the amount of interest payable to that company in respect of the relevant tax year, or nil. It follows that, unlike secondary tax on companies (STC), the deemed dividend under the dividends tax regime is not equal to the capital sum of the loan, but a deemed yearly dividend that is determined with reference to the prevailing 'market-related interest' rate.


Where the affected preferential loan is granted to a qualifying shareholder or connected qualifying shareholder subsequent to the introduction of the dividends tax regime (1 April 2012), the only issue that should arise is whether it can be said that the preferential loan was granted by the company to the qualifying shareholder 'by virtue of' any shares held by the qualifying shareholder in the company. The article considers a number of judicial pronouncements as to the meaning of this phrase, and concludes that there has to be a direct causal relationship between the holding of the relevant shares and the advance of the loan in question in order for a deemed dividend to arise in these circumstances.
The article then explores the dividends-tax implications that arise where preferential loans were granted to qualifying shareholders or connected qualifying shareholders prior to the introduction of the dividends tax regime, but remain outstanding subsequent to the introduction of dividends tax. It may be that, at the time that the loan was granted, the loan arrangement triggered a liability for STC, or that, while the loan arrangement triggered a liability for STC, an exemption applied.
The article notes that, where a preferential loan was granted by a company to a qualifying shareholder prior to the introduction of the dividends-tax regime and it was subject to STC, an exemption from dividends tax applies under section 64E(4)() of the Income Tax Act 58 of 1962, as such loan would have been 'subject to' STC as required by the exemption provision. However, while the relevant preferential-loan arrangement will therefore escape an ongoing liability for dividends tax, notwithstanding that the interest rate charged is less than the prescribed 'market-related interest' rate, should the company subsequently declare a dividend and set off the amount of dividend payable against the shareholder's indebtedness to the company, the dividend will be subject to dividends tax as no relief is granted in these circumstances.
As regards a preferential loan granted by a company to a qualifying shareholder prior to the introduction of dividends tax that had been exempt from STC under section 64C(4) of the Act, the issue that arises, and which is discussed in the article, is whether it can be said that the relevant loan can be said to have been 'subject to' STC notwithstanding that an exemption applied? On the authority of foreign judicial decisions and revenue authority approach, the article concludes that the loans in question would not be regarded as 'subject to tax' if they had been exempt from tax in terms of a statutory exemption from tax, such as section 64C(4) of the Act.
Finally, the article considers the interplay between fringe-benefits tax and dividends tax in relation to beneficial loans granted to shareholders who also happen to be employees. The article concludes that, as the causal relationship necessary to establish a liability for fringe-benefits tax or dividends tax is mutually exclusive - in that an employment cause is necessary in the case of fringe-benefits tax and a shareholding cause is necessary in the case of dividends tax - a beneficial loan granted to a shareholder who is also an employee will not be subject to both forms of taxation.

Loading full text...

Full text loading...

Loading

Article metrics loading...

/content/btclq/5/3/EJC173380
2014-09-01
2019-10-19

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