Taxation of liquidating dividends

However, these distributions can have unforeseen capital gains tax consequences for the shareholder receiving the distribution.Distributions to shareholders excluded from the definition of "dividend" in section 1 of the Income Tax Act No.The South African Revenue Service (SARS) released Binding Private Ruling 210 (Ruling) on 11 November 2015.The Ruling sets out the tax consequences of a ‘liquidation distribution’, as defined in s47(1)(a) of the Income Tax Act, No 58 of 1962 (Act), followed by an ‘amalgamation transaction’ as contemplated in s44(1)(a) of the Act.The owners of a C corporation may be interested in converting the company into a limited liability company, or LLC.

If the stocks are transferred instead, this will result in a capital gains tax on any appreciated value in the stocks at both the corporate and shareholder level.The shareholder must calculate a capital gain or loss on the part-disposal by apportioning the base cost of the share according to the ratio of the market values of both the capital distribution and the share, and treating the capital distribution as the proceeds on the part-disposal.The method of calculation may have the anomalous effect of creating taxable capital gains upon the receipt of, for example, a liquidation distribution comprising retained earnings and a portion of the originally contributed capital.Consequently, the Applicant and Co-Applicant proposed that the two companies amalgamate and consolidate their operations.The Applicant and Co-Applicant proposed that the following steps would be undertaken to achieve the abovementioned result: Step 1Sub Co would distribute all its assets to the Applicant in terms of a ‘liquidation distribution’, following which, its corporate existence will be voluntarily terminated within 36 months of such distribution.

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