BCR 78: Employee Share Scheme – shares in a foreign company

The parties to the proposed transaction are as follows:

• The applicant(s): Resident companies forming part of the same group of companies as defined in section 1(1) of the Income Tax Act 58 of 1962 (“IT Act”);
• The co-applicant/Trust: A trust to be created to administer the share incentive scheme;
• Employees: Employees of the applicant’s participating in the share incentive scheme.

The ultimate holding company of the applicants is “Holdco”, a public company tax resident in a foreign country (Country X), whose shares are listed on an exchange in Country X. The applicants propose to establish an employee share incentive scheme.

The purpose of the employee share incentive scheme will be to incentivise all the participating employees. This will be achieved by the participating employees being entitled to ongoing dividends and indirectly the capital appreciation of the scheme shares by virtue of being entitled to so-called milestone distributions and leaver distributions as defined in the scheme rules and trust deed.

The applicants will make contributions to the Trust to enable it to purchase and acquire listed shares in Holdco.

The following proposed features of the trust deed of the Trust are relevant:

• Once the Trust acquires shares in Holdco, the employees will be allocated notional units in the Trust for no consideration;
• The employees will be allocated one unit each by the trustees. The unit will entitle the employee to a portion of the dividend distributions, milestone distributions, and leaver distributions via the Trust;
• On ceasing employment, an employee forefeits the unit awarded for no value. Such unit may be reallocated or cancelled by the trustees. The benefits to be derived are dependent on the employee remaining in employment.

The proposed transaction will be achieved by way of the following transaction steps:

Step 1: The applicants make cash contributions to the Trust.

Step 2: The Trust will use the contributions to acquire shares in Holdco.

Step 3: The trustees will allocate units in the Trust to the employees.

Step 4: The Trust will seek appointment as a Foreign Withholding Trust (“FWT”) with the result that it will be liable to deduct and account for the applicable Dividends Withholding Tax (“DWT”) on dividends received by the Trust from Holdco.

Step 5: The Trust will assume the withholding and reporting obligations under Country X’s tax laws for dividends paid to beneficiaries. Such an arrangement would avoid all the participating employees from having to individually apply for the DWT relief.

Step 6: The Trust will receive the gross foreign dividends that vest in the employees and would pass the net amount (foreign dividend less the DWT applicable) to the employees.

Ruling

The ruling is as follow:

1. The contributions to be made by the applicants to the Trust will constitute expenditure deductible under section 11(a) read with section 23(g), subject to the application of section 23H.
2. The contributions to be received by the Trust will not constitute its gross income.
3. The receipt of the contributions will not result in a gain or loss as defined in the Eighth Schedule (paragraph 3) for the Trust.
4. The certificate to be issued by the Trust evidencing the DWT paid to Country X on behalf of the employees will suffice as evidence of the payment of the DWT proved to be payable for purposes of section 6quat(1A)(1)(a).

Find a copy of BCR 78 here.

11/02/2022