Abstract
The primary reason for companies entering into a Broad Based Black Economic Empowerment (hereafter referred to as BBBEE) transaction is to achieve regulatory compliance. The secondary reason cited is fulfilling the companies’ corporate social responsibility.
In a BBBEE transaction, companies sell existing shares or issue new shares that have been previously issued, at a discount. When a company sells existing or issues new shares in the context of a BBBEE transaction at a discount, it could have donations tax implications. Donations tax is triggered by either actual donations or deemed donations.
An actual donation requires a “gratuitous disposal of property”. The motive of “gratuitous” is lacking where existing shares are sold in a BBBEE transaction at a discount, because in this context, the shares are sold for economic reasons. The issue of new shares does not result in an actual donation because “property” is not disposed of, which is a fundamental requirement for a donation to take place. This study found that no actual donation takes place when a company sells existing shares or issues new shares at a discount in the context of a BBBEE scheme.
Even if no actual donation takes place, however, a deemed donation can still take place in terms of section 58(1) of the South African Income Tax Act, i.e. where property is not disposed of for adequate consideration, which does not require a gratuitous motive for a donation to be present. Therefore, when a company sells existing shares or issues new shares at a discount in a BBBEE transaction, section 58(1) of the Income Tax Act, as the most specific section, must be evaluated.
This study found that companies make use of various structures when implementing BBBEE transactions. The lack of funding led to the failure of earlier structures; consequently, these structures have evolved over time. The most recent structure introduces notional vendor financing by the empowering company in a bid to overcome the funding requirements.
M.Com. (Taxation)