Share buy-backs

​​The tax implications of share buybacks by companies are complex for both the company and its shareholders, and harsh penalties may be levied for non-compliance.

Companies frequently buy back their own shares for a variety of reasons, such as to return surplus funds to shareholders or enable shareholders to exit the company. The tax implications can be complex, both for the company and the shareholder.

Overview of the Companies Act provisions dealing with share buy-backs

The definition of ‘distribution’ in section 1 of the Companies Act 71 of 2008 includes a share buy-back. Under section 46, before a company can make a distribution, the directors must authorize it and be satisfied that the company will reasonably meet the solvency and liquidity test in section 4 immediately after completing the proposed distribution. Section 48 provides that the board of a company can determine that it can acquire a number of its own shares. A subsidiary can acquire its holding company’s shares, but all such subsidiaries may not hold more than 10% of any class of the holding company’s shares. The subsidiary may not exercise any voting rights in respect of the shares in question. Once shares of a company have been bought back, they are restored to the status of shares that have been authorized but not issued under section 35(5).

Impact on the company

While the Companies Act defines a distribution to include a share buy-back, the Income Tax Act 58 of 1962 does not contain a definition of ‘distribution’. This was not always the case. Before the introduction of dividends tax, paragraph 74 of the Eighth Schedule contained a definition of ‘distribution’ which included a share buy-back. However, it was deleted by the Taxation Laws Amendment Act 24 of 2011. The related Explanatory Memorandum noted that the term ‘distribution’ would be clarified ‘as to whether the term includes both dividends and return of capital or simply one kind of distribution’. Sadly, to date no such clarification has been forthcoming, let alone a clarification as to whether a share buy-back was intended to be included in paragraph 75. Given that the definition of ‘dividend’ clearly distinguishes between a distribution (paragraph (a)) and a share buy-back (paragraph (b)), it is doubtful whether the word ‘distribution’ in paragraph 75 includes a buy-back. In statutory interpretation there is a presumption that unless the context otherwise indicates, words in a statute are used consistently.1 It is thus more likely to refer to a transfer of cash or an asset for which there is no quid pro quo. For CGT purposes, a buy-back is simply a sale, with the proceeds being equal to the value of the shares acquired. When the company and the shareholder are connected persons, paragraph 38 requires that the proceeds be equal to the market value of the asset being disposed of.

Upon acquisition, the company’s shares will comprise an asset for an instant before being extinguished through merger, since it cannot hold shares in itself2. This extinction is treated as a non-disposal under paragraph 11(2)(b) to prevent the creation of an artificial capital loss.

A holding company can acquire its own shares by way of a distribution from a subsidiary, but in this instance paragraph 75 will trigger a disposal at market value on the date of distribution with attendant CGT consequences for the subsidiary. If the subsidiary can be liquidated or deregistered, it could distribute the shares through a ‘liquidation distribution’ under section 473. In this way, the subsidiary will not have to account for a capital gain or loss on disposal of the shares under paragraph 75 and the holding company will simply acquire them at the base cost to the subsidiary for an instant before they are restored to the status of authorised capital. No securities transfer tax will be payable by virtue of the exemption in section 8(1)(a)(v) of the Securities Transfer Tax Act 25 of 2007 on the distribution, nor it is submitted on the immediate extinction of the shares, since there would be no change of beneficial ownership.4

Impact on the holder of shares

From the perspective of the holder of shares, a share buy-back is a sale and hence a disposal under paragraph 11(1)(a). The amount received or accrued will consist of a dividend or a return of capital or both, depending on whether the company uses any part of its contributed tax capital (CTC) to buy back its shares. Any dividend element is first included in gross income before being exempt under section 10(1)(k)(i) and hence excluded from proceeds under paragraph 35(3)(a). The return of capital paid out of the company’s CTC will thus comprise the proceeds, unless the shares were held as trading stock and the amount received or accrued on their disposal is of a revenue nature, in which case paragraph 35(3)(a) will reduce the proceeds for CGT purposes to nil. Section 9C will render the amount received or accrued on the disposal of qualifying shares held as trading stock to be of a capital nature if they have been held for at least three years.

Importantly, the directors must pass a resolution confirming any payment out of CTC before the buy-back, otherwise the payment will be a dividend 5. Under the proviso to the definition of ‘contributed tax capital’ in section 1(1), a shareholder may not participate in the CTC beyond that holder’s pro-rata share. For example, if there are 100 shares in issue and ZAR 1 000 of CTC, each share may not be allocated more than ZAR 10.

In the context of listed shares, the definition of ‘dividend’ in section 1(1) contains an exception to the requirement to split the consideration for the buy-back between its dividend and CTC elements. It provides that a share buy-back will not comprise a dividend when the company buys back its shares on the open market, referred to as a ‘general repurchase’ under the JSE Limited Listings Requirements or equivalent rules under another exchange. This rule was inserted because the shareholder would be unaware that it was the company buying back the shares and so would not be in a position to split the consideration between its dividend and return of capital elements. However, when a listed company conducts a ‘specific repurchase’ from all its shareholders, the consideration will have to be split into its component parts.

For non-resident companies, the split of the buy-back consideration is based on the definitions of ‘foreign dividend’ and ‘foreign return of capital’, and not on the definition of ‘contributed tax capital’.

The definition of ‘foreign dividend’ excludes an amount paid or payable that constitutes a redemption of a participatory interest in a collective investment scheme referred to in paragraph (e)(ii) of the definition of ‘company’. The effect of this exclusion is to treat the full redemption consideration as proceeds, unless the amount is of a revenue nature.

Anti-avoidance rules

When a share buy-back consists primarily of a dividend, the result will usually be a capital loss as a result of the reduction in proceeds under paragraph 35(3)(a), which requires proceeds to be reduced when the amount in question is included in gross income 6. Under paragraph 19 this capital loss must be disregarded to the extent that it does not exceed any exempt dividends. An exempt dividend is one that is exempt from both dividends tax and normal tax under section 10(1)(k)(i) (local dividend), 10B(2)(a) (participation exemption for foreign dividends), (b) (country-to-country exemption for foreign dividends) or (e) (distribution in specie from a listed share). In the context of local dividends, paragraph 19 would generally apply to a resident corporate shareholder for which the dividend is likely to be exempt from dividends tax and normal tax. Paragraph 19 will not apply to the extent that paragraph 43A applies.

Paragraph 43A treats a corporate shareholder as having additional proceeds when it disposes of shares in a company (including by way of a share buy-back) and it held a qualifying interest 7 in that company at any time during the 18 months prior to the disposal. The shareholder is deemed to have proceeds equal to any exempt dividends comprising extraordinary dividends in respect of the shares. An exempt dividend is exempt from both dividends tax and normal tax under section 10(1)(k)(i), section 10B(2)(a) or (b). An extraordinary dividend is defined separately in relation to a preference share and any other share. In relation to any other share, it means so much of any dividend received or accrued:

  • within a period of 18 months prior to the disposal of that share; or
  • in respect, by reason or in consequence of that disposal,

as exceeds 15% of the higher of the market value of that share at the beginning of the period of 18 months and at the date of disposal of that share.

Although a share buy-back falls within the second bullet point, it seems that the dividends falling within both bullets must be aggregated, given the reference to ‘any dividend’ in the opening words.

Section 22B contains rules equivalent to those in paragraph 43A in respect of shares held as trading stock.

Buy-back from employees and directors

When a share buy-back involves employees or directors who acquired equity instruments contemplated in section 8C, the dividend element of the share buy-back will not qualify for exemption. This is the broad effect of provisos (dd), (jj) and (kk) to section 10(1)(k)(i).

Reportable arrangements

A company that buys back shares from one or more shareholders for an aggregate amount exceeding ZAR 10 million and which issued or is required to issue any shares within 12 months of the buy-back is required to report the arrangement to SARS 8. Failure to report the arrangement attracts substantial monthly penalties under section 212 of the Tax Administration Act 28 of 2011. These penalties start at ZAR 50 000 a month for the participant and ZAR 100 000 for the promoter and run for 12 months, and depending on the magnitude of the tax benefit, are doubled or tripled.


The buy-back by a company of its own shares has been characterized by many aggressive tax avoidance arrangements, necessitating some complex anti-avoidance rules and harsh penalties for the non-reporting of reportable arrangements. Being acquainted with the provisions affecting share buy-backs is essential if costly mistakes are to be avoided.

This article was first published in ASA November 2021.

1 ITC 1420 (1986) 49 SATC 69(T) at 74.

2 Grootchwaing Salt Works Ltd v Van Tonder 1920 AD 492.

3 BPR 336 dated 6 December 2019.

4 See definition of ‘transfer’ in the STT Act.

5Subpara (bb) of the definition of ‘contributed tax capital’.

6Paragraph (k) of the definition of ‘gross income’ includes a dividend and a foreign dividend..

7Defined in para 43A(1) in relation to shareholdings in listed (at least 10%) and unlisted companies (at least 50% or 20% when no one else together with connected persons holds the majority of the shares).

8 GN 140 GG 39650 of 3 February 2016.


These materials are provided for general information purposes only and do not constitute legal or other professional advice. While every effort is made to update the information regularly and to offer the most current, correct and accurate information, we accept no liability or responsibility whatsoever if any information is, for whatever reason, incorrect, inaccurate or dated. We accept no responsibility for any loss or damage, whether direct, indirect or consequential, which may arise from access to or reliance on the information contained herein.

© Copyright Webber Wentzel. All Rights reserved.

Webber Wentzel > News > Share buy-backs
Johannesburg +27 (0) 11 530 5000
Cape Town +27 (0) 21 431 7000
Validating email against database, please wait...
Validating email: please wait...
Email verified: Please click the confirmation link sent to your mailbox, also check junk/spam folder. If you no longer have access to this email address or haven't received the verification email then email
Email verified: You are being redirected to manage your subscription
Email could not be verified: Please wait while you are redirected to the Subscription Form
Unanticipated error: Saving your CRM information Subscription Form