IN 126 – Extraordinary dividends treated as income or proceeds on the disposal of shares

The current section 22B and paragraph 43A came into operation on 19 July 2017 and apply to any disposal of shares on or after that date. These provisions are anti-avoidance provisions aimed at “dividend-stripping” when a shareholder reduces the value of a shareholding through extracting exempt dividends so that, upon the subsequent disposal, the taxable disposal proceeds are lower than would have been the case if all the reserves had still been retained in the company.

Although the wording of section 22B and paragraph 43A is almost identical, section 22B applies to the disposal of shares held by a company as trading stock, while paragraph 43A applies to the disposal of shares held by a company as capital assets.

Aspects to note are that:

• As of 1 January 2019, section 22B and paragraph 43A do not apply to the disposals of shares under a deferral transactions, namely the corporate rollover transactions contained in section 42-47 of the IT Act.
• “Exempt dividend” in section 22B(1) and paragraph 43A(1) is defined as any dividend or foreign dividend to the extent that the dividend or foreign dividend is not subject to dividends tax; and not subject to normal tax under section 10(1)(k)(i) or section 10B(2)(a) or (b).
• In relation to a share other than a preference share, an extraordinary dividend means so much of the amount of any dividend received or accrued within a period of 18 months before 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 as at the beginning of the period of 18 months and as at the date of disposal of that share.

These provisions are triggered by either an actual disposal or a deemed disposal.

Actual disposal:

The provisions are triggered by the disposal by a company of a qualifying interest held in another company. An interest in an unlisted company will constitute a qualifying interest if a company’s shareholding exceeds 50% in another entity, or 20% provided no other person holds a majority (more than 50%).  

Deemed disposal:

Following the introduction of section 22B(4) and paragraph 43A(4) on 20 February 2019, these provisions are also triggered if the effective interest held by the company in the equity shares of the target company is reduced on or after that date.

The effect of these provisions applying is that the amount of the extraordinary dividend must be included in income or taken into account as proceeds on disposal of the shares –

• in the year of assessment in which those shares are disposed of or deemed to be disposed of; or

• if the dividend is received or accrues after that year of assessment, in the year of assessment in which the dividend is received or accrues.

The Interpretation Note can be accessed here.

25 November 2023