Share buybacks: a tax efficient method to exit a company despite legislative amendments to curb abuse

Abstract

Share buyback transactions are a common method used by shareholders to divest from their interest in a company. Due to the favourable tax dispensation provided to dividends, corporate shareholders may dispose of their shares through a share buyback transaction and eliminate or reduce their tax liability that would otherwise have been payable in respect of a conventional sale of shares. This leads to tax arbitrage. In 2017 and 2019, National Treasury undertook to curb the abuse of share buyback transactions. Consequently, legislative amendments were introduced to certain anti–avoidance provisions in the Income Tax Act 58 of 1962 to include share buyback transactions within their ambit. The legislative amendments aim to tax share buyback transactions on the same or similar basis as a conventional sale of shares. However, notwithstanding the legislative amendments, certain variations of share buyback transactions still fall outside their scope and application. Therefore, a share buyback transaction arguably remains a tax–efficient method for a shareholder to exit a company, despite the legislative amendments to curb abuse. The purpose of this research report is to analyses the scope and application of the legislative amendments and evaluate their efficacy in curbing the abuse of share buyback transaction