Share buy-backs and dividend stripping

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In the 2017 Budget, delivered by the Minister of Finance, it was proposed that additional measures will be considered to circumvent transactions where investors choose to realise their share investments by means of having the shares they hold in a company bought back and characterised as a dividend, while being paid for by means of a new investor subscribing for shares in the same company.

This followed on the back of a similar announcement in 2016, whereafter no two specific countermeasures were introduced.

The primary concern throughout this period being the structuring in and perceived abuse of the local resident company-to-company dividend exemption to facilitate tax neutral disposals of investments, without incurring either dividends tax or capital gains tax.

Dividend

Further to the above, concern has been raised that the local resident company-to-company dividend exemption additionally presents taxpayers with arbitrage opportunities through dividend stripping.

The arbitrage is achieved through the declaration of extraordinary pre-sale dividends to a resident shareholder, which are exempt from tax.

The effect thereof is to reduce the capital gains proceeds, which would otherwise have arisen upon disposal of the shares. Section 22B and paragraph 43A of the Eighth Schedule were previously introduced into the ITA to mitigate this behaviour and already deem a pre-sale dividend to be as an amount of income or proceeds.

These sections are however subject to…


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