By Schalk Pieterse – TRM Tax Attorneys
When a shareholder sells a company, the question I am asked first is often not the price. It is how much of the price the seller keeps. That question sits at the centre of Company AF (Pty) Ltd and Others v CSARS [2026] ZATC 6, handed down by the Tax Court in Cape Town on 3 July 2026. The court applied the general anti-avoidance rule, the GAAR in sections 80A to 80L of the Income Tax Act, to a dividend strip, and it did so drawing on the Constitutional Court’s April judgment in Absa. Absa binds every other court on the issues it decided. Company AF is a Tax Court decision on its own facts. Read together, they change how I think any sale, acquisition or restructure should be planned.
What is dividend stripping?
A company that sells shares normally pays capital gains tax on the gain. A dividend from a South African company is, in contrast, generally exempt from normal tax under section 10(1)(k)(i), and where the recipient is a South African company it is also exempt from dividends tax under section 64F(1)(a). Dividend stripping uses that difference. Before the sale, value is taken out of the target as an exempt dividend. The shares are then sold for far less, so there is little or no gain to tax. The seller receives much the same value, but mostly as a dividend instead of a sale price.
Paying out genuine accumulated profits before a sale is ordinary, and the court said so. The difficulty arises where the money for the “dividend” comes from the buyer.
The transaction in Company AF
Seven companies held most of the shares in a self-storage business. A property group wanted to buy all of it. The deal was implemented in February 2017 in four steps. The target declared a dividend of about R274.7 million. The buyer’s subsidiary subscribed for new shares for about R280.3 million, which gave it 99.99% of the target. The target paid the dividend to its shareholders out of the subscription money. The shareholders then sold their original shares, now worth almost nothing, to that subsidiary for R1 000 in total.
The seven companies treated what they received as exempt dividends and declared no capital gain. SARS applied the GAAR, disregarded the dividend and subscription steps, and assessed them to capital gains tax as if they had simply sold their shares.
What the court decided
Francis J upheld the assessments. Four findings carry the judgment. The first is the tax benefit. Following Absa, the court compared the deal not with “no transaction” or with a plan the sellers had abandoned, but with the transaction actually carried out, stripped of its avoidance features. On the evidence, that was a sale of the shares for full value, which would have attracted capital gains tax. The right comparison will always depend on the facts of the deal.
The second is purpose. The court accepted that the sellers had a real commercial reason to sell, and SARS accepted it too. But it held that the purpose of doing the deal must be kept apart from the purpose of giving it the form it took. A plain sale of shares would have achieved the same commercial result. The pre-closing dividend funded by the buyer’s subscription “added nothing to the commercial result” (para 85). The court found that the main purpose of the structuring was fiscal. Purpose under the current GAAR is judged objectively, so the court did not rest its finding on anyone’s credibility. The contemporaneous documents weighed most heavily, including a shareholder circular that said no capital gains tax would be payable.
The third concerns the principle in CIR v Conhage (Pty) Ltd 1999 (4) SA 1149 (SCA) that a taxpayer may choose the most tax-efficient way to achieve a commercial result. The court confirmed that the principle stands. It protects a choice between genuine routes to the same destination. It does not protect “a step grafted onto the chosen route whose only distinguishing operation is to alter the tax outcome” (para 90). That is an application of the GAAR to the evidence. It is not a rule that a step is abusive merely because it saves tax.
Last, the court found four tainted elements, each on its own footing. Among them, the money moved in a closed circle and left the target as valuable as before, which is not how a normal pre-sale dividend works. The dividend and the subscription offset each other, which section 80C(2)(b)(iii) treats as a sign that commercial substance is lacking. And the dividend exemption, which exists to stop company profits being taxed again as they move between companies, was used to turn the proceeds of a sale into an exempt dividend.
Penalties, and the value of good advice
The sellers had a specific written tax opinion on their own facts, and the target disclosed the arrangement to SARS as a reportable arrangement in May 2017, before any audit. The court held that their position was an error of legal judgment, made in good faith in an area that was then unsettled. It remitted the 75% understatement penalties, and it set aside the provisional tax penalties and sent them back to SARS to reconsider. The tax itself, and the interest, stood. The taxpayers also won a preliminary point: SARS was held to the arrangement it had assessed and could not rely on a materially different one on appeal.
The penalty rules have since changed. Company AF applied section 222(1) of the Tax Administration Act in its earlier wording, under which no understatement penalty was payable for a bona fide inadvertent error. From 1 April 2026, the Tax Administration Laws Amendment Act 4 of 2026 removed that exception from section 222(1). It is now a ground on which SARS must remit a penalty under section 223(3), but only a penalty for a substantial understatement. Section 223(3) allows the same remission, again only for a substantial understatement penalty, where on strict conditions the taxpayer made full disclosure and held an opinion by an independent registered tax practitioner. Neither route reaches the 75% penalty for an impermissible avoidance arrangement. The penalty outcome in Company AF therefore arose under the old wording. Advice and disclosure remain valuable, but under the current law they do not guarantee that a penalty will be avoided.
The Absa judgment
Absa Bank Ltd and Another v CSARS [2026] ZACC 15, decided by the Constitutional Court on 22 April 2026, also turned on exempt dividends from a share subscription. Absa and its subsidiary United Towers subscribed for about R1.9 billion of preference shares in a funding structure introduced by the Macquarie Group, and received tax-exempt dividends. Further down the chain, the funds passed through other entities. Absa said it knew nothing of those steps. SARS treated the dividends as taxable interest.
The majority held that Absa could be a party to the arrangement even if it did not know of the downstream steps, and that whether a tax benefit arose is tested against the transaction stripped of its avoidance features. The case came to the Court on a review of the assessments at an early stage, so it did not finally decide whether the dividends were taxable. That still has to run its ordinary course. For anyone who invests in, funds or buys into a structure designed by someone else, not knowing the detail may not be enough. That does not make every investor or funder liable for someone else’s tax benefit.
The specific rules now in place
The Company AF transaction took place before the current section 22B and paragraph 43A of the Eighth Schedule came into operation on 19 July 2017. Narrower rules applied before then. In broad terms, where a company disposes of shares in another company in which it held a qualifying interest at any time in the previous 18 months, other than under a deferral transaction, an exempt dividend received in those 18 months, or because of the disposal, counts to the extent that it is an “extraordinary dividend”. For shares other than preference shares, that is the part that exceeds 15% of the higher of the shares’ market value at the start of the 18 months and at disposal. Section 22B adds it to income where the shares are trading stock, and paragraph 43A adds it to proceeds where they are capital assets. Since 20 February 2019, a dilution of the holding through new shares issued to someone else is treated as a disposal for these purposes. That rule is directed at the subscription route used in Company AF. The provisions are technical, and they do not apply to every share sale or every dividend.
The court made it clear that these later rules were not the basis of its finding (para 111). The GAAR applied on its own, and in my view it remains behind, and alongside, the specific rules for any structure that falls outside them.
Structuring acquisitions after Company AF
Planning a deal tax efficiently remains lawful. What has changed is how well its form must be justified. I would test any acquisition, disposal or group restructure against five questions. Can each step be explained without the tax result? If a step achieves nothing commercially that a simpler route would not, it is likely to be the step SARS looks at first. What will the documents say? Circulars, opinions and fee calculations are written while the deal is being designed, and in Company AF they carried more weight than the witnesses’ evidence, although the court made no finding that any witness was dishonest. Does a party need this structure for its own non-tax reasons? The court said the presumption of a tax purpose can be rebutted by objective proof that an independent party required the structure for its own reasons, but that has to be real and on record. Do section 22B, paragraph 43A or the corporate rules in sections 41 to 47 apply, and is there a GAAR risk behind them? And is there a specific written opinion, and has the reportable arrangement position been considered? That will not save the tax, and after the 2026 amendments its effect on a penalty has to be checked on the facts.
How we can help
If you are planning to sell, buy or restructure a business, or you implemented a structure along these lines in the past and want to know where you stand before an audit letter arrives, I am happy to give you an initial assessment and legal prognosis at no charge. Send a short note of the facts to schalk@trmlaw.co.za and I will come back to you.
Intellectual property disclaimer:
The contents of any article published by TRM Tax Attorneys should not be construed as professional legal advice.
