Category Archives: Finance

MSI Global Alliance adds two new members

MSI Global Alliance, one of the world’s leading international associations of independent legal and accounting firms, is pleased to announce the appointment of two new member firms Bowditch & Dewey, LLP in Massachusetts, USA and Dixcart Management (Cyprus) Limited in Cyprus.

With nearly 60 lawyers in three Massachusetts locations, Bowditch & Dewey, LLP offers a depth of practice in several areas of practice, including business and finance, real estate and environmental law, litigation, employment and labour (including immigration), tax controversy and estate and tax planning. Fortune 500 companies, start-ups, institutions and individuals rely on the firm to craft their business and legal strategy.

James D. Hanrahan, managing partner of Bowditch & Company, LLP, comments, “Our partners view the global reach provided by membership in MSI as both a client service and competitive advantage. The network has already proven to be a valuable resource to our clients with international needs. We look forward to a rewarding and effective partnership with all member firms.”

Corporate services provider, Dixcart Management (Cyprus) Limited, joins MSI in Limassol, Cyprus. The two partner firm advises corporate and private clients on creating and using structures in Cyprus and offers comprehensive corporate provider services including company formation and incorporation, management of companies, family office services and relocation advice.

Dixcart Management (Cyprus) Limited is the fourth office of the independent group Dixcart to join MSI, which has been providing professional expertise to organisations and individuals for over 40 years.

Robert Homem, managing director of Dixcart Management (Cyprus) Limited, comments, ”It is a pleasure joining the MSI Global Alliance, and we look forward to meeting and working with other MSI members.”

Tim Wilson, chief executive of MSI, comments, “I am delighted to welcome these two new additions to the MSI family.  Bowditch & Dewey is a well-established and highly respected law firm with a strong reputation throughout New England. I know they will contribute greatly to MSI, both within North America and internationally.  MSI has had a long association with Dixcart in a number of jurisdictions and I am very pleased to strengthen this further with their office in Cyprus joining us and adding to our existing member firms there.”

View the press release online

Kind regards,

Pauline

MSI Global Alliance appoints two new member firms in Brazil and Denmark

MSI Global Alliance, one of the world’s leading international associations of independent legal and accounting firms, is delighted to announce the appointment of two new member firms to its international membership as of 1 July 2017.

MSI’s presence in Brazil will be strengthened by the addition of DDSA – De Luca, Derenusson, Schuttoff e Azevedo Advogados (DDSA) in Brazil. Based in Sao Paulo, DDSA is a full service law firm which provides comprehensive services in areas such as corporate law, tax law, M&A and contracts, compliance, aviation, infrastructure, real estate, insurance law, litigation, bankruptcy and reorganization, as well as employment, social security and environment law.Established in 2011, the 11 partner-firm and its highly experienced team of 45 staff advises and acts for national and international clients from a wide range of industries.Also joining MSI is accounting firm Piaster located in Copenhagen, Denmark. Founded in 2005, the four partner firm provides a wide range of services within audit, assurance, tax, vat, compilation and compliance as well as advisory services to an international client base.

Piaster will be replacing MSI’s existing Danish accounting member Wyrwik – Statsautoriseret Revisionsanpartsselskab (Wyrwik). Both firms have enjoyed a long-standing business relationship over the years. Wyrwik’s managing partner, Lisbeth Wyrwik, introduced Piaster to MSI and will continue to work closely with both Piaster and MSI in her role as one of the international contact partners for Piaster.

Tim Wilson, chief executive of MSI, comments, “I am very pleased to welcome our new members to MSI. DDSA is a strong, established law firm, which will complement our existing presence in Brazil and further strengthen MSI in Latin America. I am also very pleased to welcome Piaster, a dynamic and ambitious accounting firm, which will maintain strong links with Wyrwik thereby enabling us to build on MSI’s strength in Denmark.”

MSI Global Alliance
Pauline Rottstock, Marketing and Business Development Manager
Tel: +44 20 7583 7000
Email: prottstock@msiglobal.org

About MSI Global Alliance
MSI is one of the world’s leading international associations of independent legal and accounting firms. With over 250 carefully selected member firms in more than 100 countries, MSI is one of the world’s leading associations of independent legal and accounting firms. MSI was formed in 1990 in response to the growing need for cross-border co-operation between professional services firms.
www.msiglobal.org

Interest free loans to directors

It is very often the case that a company extends an interest free or low interest loan to a director. This manifests either as a true incentive or benefit to that director (mostly the case in larger corporate environments) or in a small business environment in lieu of salaries paid. The latter is especially the case for example where a spouse or family trust would hold the shares in the company running the family business, but which business is conducted through the efforts of the individual to whom a loan is granted from time to time.

In terms of the Seventh Schedule to the Income Tax Act[1] a director of a company is also considered an “employee”.[2] This is significant, since directors can therefore also be bound by the fringe benefit tax regime applicable to employees generally.

Paragraph (i) of the definition of “gross income” in the Income Tax Act[3] specifically includes as an amount subject to income tax “the cash equivalent, as determined under the provisions of the Seventh Schedule, of the value during the year of assessment of any benefit … granted in respect of employment or to the holder of any office…”

Clearly, benefits received by a director of a company would therefore rank for taxation in terms of this provision. The question remains therefore whether loans provided to such directors by the companies where they serve in this capacity would amount to such a taxable benefit, and further how such benefit should be quantified.

Paragraph 2(f) of the Seventh Schedule is unequivocal in its approach that a taxable fringe benefit exists where “… a debt … has been incurred by the employee [read director], whether in favour of the employer or in favour of any other person by arrangement with the employer or any associated institution in relation to the employer, and either-

(i)            no interest is payable by the employee in respect of such debt; or

(ii)           interest is payable by the employee in respect thereof at a rate of lower than the official rate                of interest…”

Paragraph 11 in turn seeks to quantify the amount of the taxable fringe benefit to be included in the gross income of the director. Essentially, the taxable fringe benefit would be equal to so much of interest that would have been payable on the loan at the prime interest rate less 2.5%, less any interest actually paid on the loan. The benefit therefore does not only arise on interest-free loans, but also on loans carrying interest at less than the prescribed interest rate.

It is necessary to note that a fringe benefit otherwise arising will not be a taxable benefit if the loan amount is less than R3,000, or if it is provided to the director to further his/her studies.

[1] 58 of 1962
[2] Paragraph 1 of the Seventh Schedule, paragraph (g) of the definition of “employee”
[3] See section 1

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

Interest free loans cross border

A consideration of the tax consequences of interest free loans will be incomplete if not also considered in the context of interest free debt funding being provided cross-border. Typically, when “cheap debt” is encountered it is in the form of low interest or interest free loans being provided to related parties (or “connected persons” as defined) due to the non-commercial nature of such an arrangement. This is especially the case for the lender, who could typically receive far greater returns on investment if utilising excess cash in another manner. However, due to group efficiencies, it may be preferable for one group company to provide low interest or interest free financing to a fellow group company, especially if this also has the potential to unlock certain tax benefits.

One such manner in which a corporate group may save on its ultimate tax bill is to ensure that funding is provided by a company situated in a low tax jurisdiction, such as Mauritius for example (which levies a corporate tax rate of effectively 3%). Were the Mauritius company to lend cash to a South African group company, the group would prefer it to do so at a very high rate. This would ensure that the South African company is able to deduct interest in a corporate tax environment where it would create a deduction of effectively 28%, whereas the tax cost would only be 3% in Mauritius.

Where the South African company however is in the position that it sits on the group’s cash resources, it would want to lend money to the Mauritius company at as low rate as possible. Interest, to the extent charged, will now only be deductible at an effective 3% in Mauritius (where the borrower is situated), whereas interest received will be taxed at 28% in South Africa. Such a loan would therefore be most tax efficiently structured as an interest free loan.

The transfer pricing regime, contained in section 31 of the Income Tax Act,[1] seeks to legislate against this tax avoidance behaviour. The provision, which covers all cross border transactions entered into by connected persons, but specifically also cross border debt financing, determines that in such instances “… the taxable income or tax payable by any person contemplated … that derives a tax benefit … must be calculated as if that transaction, operation, scheme, agreement or understanding had been entered into on the terms and conditions that would have existed had those persons been independent persons dealing at arm’s length.”

In other words, the tax consequences of cross border debt funding with connected persons will be calculated as though arm’s length interest rates would have been attached thereto. Therefore, even though the loan extended by the South African company above to the Mauritian company would have been interest free in terms of the financing agreement, the South African company will still be taxed in South Africa as though it has received interest on arm’s length terms. The same is true for the exaggerated rates that may have been charged had the South African company been the lender: SARS would adjust these rates downward to ensure that the South African company does not claim inflated interest costs.

Using interest free or low interest loans as a tool to increase tax efficiency, especially in a cross border context, much be approached with circumspection. It may very often amount to a blunt and clumsy tax planning tool at best.

[1] 58 of 1962

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

Interest free loans with companies

The latest annual nation budget presented in Parliament proposed the dividends tax rate to be increased with almost immediate effect from 15% to 20%. The increased rate brings into renewed focus what anti-avoidance measures exist in the Income Tax Act[1] that seeks to ensure that the dividends tax is not avoided.

Most commonly, the dividends tax is levied on dividends paid by a company to individuals or trusts that are shareholders of that company. To the extent that the shareholder is a South African tax resident company, no dividends tax is levied on payments to such shareholders.[2] In other words, non-corporate shareholders (such as trusts or individuals) may want to structure their affairs in such a manner so as to avoid the dividends tax being levied, yet still have access to the cash and profit reserves contained in the company for their own use.

Getting access to these funds by way of a dividend declaration will give rise to such dividends being taxed (now) at 20%. An alternative scenario would be for the shareholder to rather borrow the cash from the company on interest free loan account. In this manner factually no dividend would be declared (and which would suffer dividends tax), no interest accrues to the company on the loan account created (and which would have been taxable in the company) and most importantly, the shareholder is able to access the cash of the company commercially. Moreover, since the shareholder is in a controlling position in relation to the company, it can ensure that the company will in future never call upon the loan to be repaid.

Treasury has for long been aware of the use of interest free loans to shareholders (or “connected persons”)[3] as a means first to avoid the erstwhile STC, and now the dividends tax. There exists anti-avoidance legislation; in place exactly to ensure that shareholders do not extract a company’s resources in the guise of something else (such as an interest free loan account) without incurring some tax cost as a result.

Section 64E(4) of the Income Tax Act provides that any loan provided by a company to a non-company tax resident that is:

  1. a connected person in relation to that company; or
  2. a connected person of the above person

“… will be deemed to have paid a dividend if that debt arises by virtue of any share held in that company by a person contemplated in subparagraph (i).” (own emphasis)

The amount of such a deemed dividend (that will be subject to dividends tax) is considered to be effectively equal to the amount of interest that would have been charged at prime less 2.5%, less so much of interest that has been actually charged on the loan account.

It is important to also appreciate that the interest free loan capital is not subject to tax, but which would also have amounted to a once-off tax only. By taxing the interest component not charged, the very real possibility exists for the deemed dividend to arise annually, and for as long as the loan remains in place on an interest free basis.

[1] 58 of 1962
[2] Section 64F(1)(a)
[3] Defined in section 1 of the Income Tax Act

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

 

Interest free loans and trusts

The recent introduction of section 7C to the Income Tax Act[1] brought the taxation of trusts, and the funding thereof specifically, under the spotlight again. Briefly, section 7C seeks to levy donations tax on loans owing by trusts to connected parties (typically beneficiaries or the companies they control). To the extent that interest is not charged, a donation is deemed to be made by the creditor annually amounting to the difference between the interest actually charged (if at all), and interest that would have been charged had a rate of prime – 2.5% applied.

What many lose focus of is that interest free (or low interest) loans have income tax consequences too, over and above the potential donations tax consequence arising by virtue of section 7C. Section 7 of the Income Tax Act is specifically relevant. This section aims to ensure that taxpayers are not able to donate assets away and which would rid themselves of a taxable income stream.

In broad terms, section 7 deems any income that accrues to a trust or beneficiary to be the income of the donor if the income accrues from an asset previously the subject of a “donation, settlement or other disposition”. In other words, where a person donates a property to a trust, the rental income generated will not be taxed in the hands of the beneficiary or the trust, but in the hands of the donor. Section 7 therefore acts as an anti-avoidance provision to ensure that taxpayers do not “shift” tax onto persons subject to less tax through donating income producing assets out of their own estates.

It is interesting to now consider what an “other disposition” would amount to. Various cases have confirmed that an interest free loan would be treated as such and that, to the extent that interest is not charged, this would amount to a continuing donation.[2] The implication thereof is this: assume the funder of a discretionary trust sells a property to that trust on interest free loan account. Any rental earned would ordinarily have been taxed in the hands of the trust or the beneficiary, depending on whether distributions will have been made. However, since section 7 will apply to the extent that no interest was charged on the loan account, a portion of the rental income will now be taxable in the hands of the trust funder.

The take-away is that donations to trusts have income tax implications for the donor too, over and above a donations tax consequence. This will also be the case where interest free loans are involved.

[1] 58 of 1962

[2] Honiball and Olivier, The Taxation of Trusts (2009) at p. 84 and following

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

 

Capital gains and cancelled sales

Many transactions in terms in which assets are sold are subject to suspensive conditions. In terms of such agreements, the sales transaction will only take place once all the suspensive conditions have been met.[1] Many other agreements may however be subject to a resolutive condition. A resolutive condition involves one whereby an agreement is cancelled if that condition is subsequently met. For example, where a person (A) sells a vehicle to B, subject to the condition that the agreement be cancelled if B is unable to obtain a driving license within a year, such a condition could be described as a resolutive condition. From a legal perspective, it is important to understand though that a valid agreement of sale had already been entered into between A and B, irrespective thereof that a year has not yet passed within which B is afforded the opportunity to obtain the contemplated driving license. This is also the case for capital gains tax (CGT) purposes. Only later, if the resolutive condition is met, is the agreement cancelled with retrospective effect.

Where a resolutive condition becomes operational, and a historic sale cancelled, this may give rise to practical problems for the seller from a CGT perspective. A CGT cost may already have been suffered in a previous year of assessment in relation to the asset disposed of. Now that the sale is cancelled, a taxpayer cannot revisit previous returns already submitted. The Income Tax Act only makes provision for a capital loss to be created in those instances,[2] but which in and of itself does not necessarily carry any value. Consider for example where future capital gains will not be realised again by the taxpayer and against which it can set-off the loss now created. It is possible therefore for a person to pay CGT on a transaction that was cancelled subsequently.

Such a scenario recently played itself out in the Supreme Court of Appeal judgment in New Adventure Shelf 122 (Pty) Ltd v CSARS.[3] There the taxpayer had sold a property near Stilbaai in September 2006 and declared a capital gain of R9,746,875 to SARS. On this amount, a CGT cost of R1,413,007 arose. Due to financial problems on the side of the purchaser however, the agreement was cancelled in November 2011 and the property returned to the seller. The seller now sought to reopen its past assessments to correct the declaration of the capital gains declared that no longer could be said to have arisen for those years of assessment. SARS would not allow this, and the taxpayer unsuccessfully sought to initiate review proceedings against SARS in the High Court. On appeal to the Supreme Court of Appeal, the taxpayer was again unsuccessful.

The Court confirmed that tax was an annual event. “In summary, the cancellation of the sale did not entitle the appellant to have his tax liability for the 2007 year re-assessed.” And elsewhere the Court reminded again that “… even if in certain instances it may seem ‘unfair’ for a taxpayer to pay a tax which is payable under a statutory obligation to do so, there is nothing unjust about it. Payment of tax is what the law prescribes, and tax laws are not always regarded as ‘fair’. The tax statute must be applied even if in certain circumstances a taxpayer may feel aggrieved at the outcome.”

[1] Paragraph 13(1)(a) of the Eighth Schedule to the Income Tax Act, 58 of 1962

[2] Paragraph 3 and 4 of the Eighth Schedule

[3] (310/2016) [2017] ZASCA 29 (28 March 2017)

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

Are Retirement Annuities still useful?

Retirement annuities are often misunderstood and many people, or their parents, have had bad experiences with tem in the past. This sentiment often relates to the investment performance and possibly also the charges related with these products. Some facts need to be considered before you discard this very useful investment vehicle for yourself.

When talking about financial planning and investments it is not uncommon that people say and hold opinions such as “I don’t like retirement annuities, they are terrible investments!” Usually it has to do with the performance and people can’t understand how after 10 years of contributing to a retirement annuity (RA), it is worth less than the amount they have put in.

This sentiment leads to a variety of discussion points, ranging from the fact that an RA is an investment vehicle or product wrapper, not an investment strategy or fund itself, to the fact that returns achieved are as a result of the underlying asset classes invested into, and will thus vary from one RA to the next.

What is meant by an investment vehicle or product wrapper?

Simply put often an investment vehicle, or product wrapper, has been created by legislation and usually tax legislation. Well at least that is the case for RA’s.

The government has for a long time been concerned that people do not save enough money for retirement, and ultimately people that are unable to work due to old age become a burden on the state. The state therefore has to address this and has therefore created specific tax treatments for RA’s in order to encourage people to use them to save for retirement specifically.

The idea is not to get too technical here, as the purpose of this information is not to go deeply into the tax benefits of RA’s save to say that the product wrapper known as an RA is merely one that carries these tax benefits. Briefly however, the contributions that are paid towards an RA are deductible from your gross income, the growth within the product is tax free, and on retirement there are certain tax free portions and thereafter different (more beneficial) tax rates for the lump sum benefits which do get paid out. You should get more information on this from your financial advisor.

What is meant by a fund?

If one understands that the RA is merely the product wrapper used and that this has nothing to do with the investment funds chosen for the actual money that is invested in this wrapper then we can start talking about investment performance. It should now be clear that the two are separate matters. Although it did not necessarily work this way in the past, but most modern RA’s now have a choice of funds the same, or at least very similar, to the funds used to make any other investment. One can even get an RA with a managed stock portfolio as an underlying investment.

The choice of funds is now up to you, with guidance from your financial advisor. The underlying assets of the fund must be matched to the objectives you are trying to achieve and your risk profile as an investor. As the objective of RA’s – retirement, is something that will usually only happen many years down the line you have the time available to use a lot of equity in your portfolio. Equity will give you the best returns over a longer period of time.

So by choosing the write underlying investment portfolio for your product wrapper, in this instance the RA, you would find that the investment performance of your RA should be no different had you invested in the fund directly and not used an RA, except that you have added tax benefits, which can actually boost your returns. You now have the tax benefits of the RA product wrapper and the performance of the fund you chose to invest in. Now your only hurdle is choosing the right underlying investment.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice.  Errors and omissions excepted (E&OE)

12 Tips to be Financially Fit

Enough talk of financial doom and gloom. Try these 12 practical ideas to take your money status from out of shape to financially fit.

1. Prioritise your financial needs

Without a sense of priorities, you’ll have limited success in planning your budget. Decide what you most critically need to spend your money on, and develop a realistic spending and savings plan. If your children’s education is a key concern, then list it as a priority area and move that flatscreen TV down the list.

2. Call in the experts

A meeting with a financial planner is the first step on the road to financial independence; what follows is entirely up to you. A good qualified planner will take a holistic view of your financial situation and will suggest a plan to help you reach your goals by considering your risk profile, life stage, financial position and time available to reach those goals.

3. Clear and avoid unnecessary debt

Financially stretched or not, the last thing you need is excessive debt. This can be defined as debt that you have incurred to buy things that you don’t really need. Through careful planning with your financial planner, try to pay of all your expensive debt such as your credit card or personal loans. Anything bought on credit ends up costing you a lot more than the original price, so save up to buy something rather than paying it of – and save on interest!

4. No credit cards

With no monthly credit card payments, you will be able to purchase more things in cash, and you can avoid credit purchases and the interest payable that comes with credit. To remove the temptation of clocking up credit card debt again, leave your card at home or commit to only using it for emergencies.

5. Plan for your old age

You are not able to generate an income forever, so make sure your financial plan makes full provision for your retirement. Your planner can suggest retirement savings options that can accommodate your budget and financial goals. Ask your financial planner about the tax benefits of taking out a retirement annuity (RA).

6. Protect your income

Just as you should insure your prized possessions, such as your car or house, it is important to protect your greatest asset, your ability to earn income. This asset can disappear in a flash, for instance if you are disabled in an accident or if you lose the ability to work due to serious illness. Most people think it won’t happen to them, but it really isn’t worth taking that chance. A range of income protector plans or disability cover options are available from financial services providers to safeguard yourself if you are no longer able to work.

7. Quit pricy bad habits

Smoking doesn’t just spell bad news for your health. It’s also bad news for your pocket. Depending on how much you smoke, quitting the habit can save you about R600 per month (or R7 200 a year). Also, a non-smoker generally pays lower life insurance premiums and is healthier, which means fewer visits to the doctor and saving on medication costs.

8. The s-word…

If you want to achieve your financial goals and live your dreams, you simply have to start saving. If your employer offers you an annual increase, allocate a portion of it to savings before you get used to having the extra money in your pocket. Better yet, set up a monthly savings account debit order on the day you get paid! That way you won’t miss the extra money, as it will feel like you never really had it to begin with. You might think you can’t afford to save, but you will be surprised how you can make it work if saving is your priority.

9. Work on your spending habits

It’s easy to spend our hard-earned salary on less important expenses – money that could be used to achieve a particular goal, or for emergency savings. Because it’s so easy to “swipe the plastic”, leave your credit cards at home and try to only bring them out in emergencies. Watch out for cash leakage. If cash in your purse disappears – leaving you with nothing to show for it – take note of what you spent it on.

10. Plan your spending

Plan purchases. Only buy what you planned to buy. Make a shopping list and stick to it so you don’t overspend. When buying big, expensive items, do an online search for price comparisons. Always ask yourself: Do I really need this? If the answer is no, then put the item back and walk away.

11. Make sure you have a Will

Everyone should have a Will. Not only does will it indicate the beneficiaries of your estate when you die, it also helps to ensure that your last wishes are known and understood. For example, you may have very specific instructions on who should take care of your minor children should you die unexpectedly. Having a Will means that your family and friends will be comforted during a very difficult time in the knowledge that your last wishes were clearly communicated.

12. Plan for the longer term

Once you’ve put everything into place, set your vision on the longer term. It’s well and fine to plan one year in advance, but to really achieve your goals, you need to think further ahead.

By Karin Muller, Head of Growth Market Solutions at Sanlam

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)

Financial assistance and the Companies Act

One of the more significant changes that the “new” Companies Act, 71 of 2008, brought about was that a company may now provide financial assistance to prospective shareholders to subscribe for shares in that company. In other words, it may lend persons money to enable them to subscribe for shares in the lender (although other forms of financial assistance is also contemplated – see below). Previously, in terms of section 38 of the now repealed Companies Act, 61 of 1973, this was not allowed.

In terms of section 44 of the “new” Companies Act, financial assistance by a company would include extending a loan, guarantee or the providing of security to enable a person to obtain funding for purposes of acquiring shares in that company. Section 44 seeks to regularise such instances of financial assistance however, and this would extend beyond the mere granting of a loan to a would-be shareholder. The wide definition of “financial assistance” makes it clear that the section covers various scenarios and also specifically where financial assistance by a company is provided to anyone not only for the purpose of enabling him or her to subscribe for shares in that company, but also if the assistance is to enable shares to be acquired in a related company.

The purpose of the provision is quite clearly to protect existing shareholders. For example: if a company were to lend money to a prospective shareholder who is subsequently unable to repay the assisting company, that company would have effectively diluted the shareholding interests of the existing shareholders (who would have paid cash for their shares), whilst the new shareholder who is unable to repay the company still has an interest left in the company (and indirectly therefore to the cash subscription proceeds of the other shareholders).

Notwithstanding the potential negative effect of allowing shares to be subscribed for in a company on loan account, it is foreseeable that such financial assistance may be required from time to time for genuine commercial purposes and transactions that would otherwise not have been feasible. B-BBEE transactions are an excellent example of this.

For a company to give financial assistance to a would-be shareholder, the directors of the company must be satisfied that the financial assistance is fair and reasonable to the company, and further that the company will be solvent and liquid thereafter. They must also ensure that this is not in contravention of the company’s Memorandum of Incorporation. If in breach of any of these conditions, the directors may potentially be held personally liable. Typically, the shareholders of the company must also approve thereof by way of a special resolution.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)