Section 8G of the Income Tax Act, an anti-avoidance rule, was introduced to prevent the artificial inflation of Contributed Tax Capital (CTC). CTC is a tax concept tracking shareholder-invested capital, allowing it to be returned tax-free, unlike taxable dividends. The rule targets schemes where a foreign parent would use a new South African (SA) holding company to acquire shares in an existing subsidiary at a higher market value, creating a large CTC balance for tax-free repatriation. However, due to ambiguous drafting, National Treasury has officially acknowledged that its application has unintended consequences, penalising legitimate and commercially driven intra-group funding transactions and deterring foreign investment.
The provision's central flaw is the undefined term “acquire”. While the term clearly covers purchasing existing shares, there is a significant risk that the South African Revenue Service could interpret it to include subscribing for new shares. This broad interpretation extends section 8G from a targeted anti-restructuring rule into a punitive tax on genuine equity funding for organic growth. For instance, if a foreign parent injects capital to fund the construction of a new factory by having its SA holding company subscribe for new shares in an operating subsidiary, the CTC created is not the value of the cash injected, but is instead limited to the subsidiary's historical CTC. This effectively re-characterises growth capital, subjecting it to a potential 20% dividends tax upon repatriation and creating a "first-mover disadvantage" where the initial investment taints all subsequent funding.
In direct response to this acknowledged overreach, the 2025 Draft Taxation Laws Amendment Bill proposes a targeted reform, introducing a specific exclusion for transactions where a foreign parent injects new cash into a SA holding company to acquire shares in a subsidiary from independent, third-party minority shareholders. This provides a clear safe harbour for M&A-driven consolidation, removing a major tax impediment to achieving 100% ownership of a SA subsidiary.
While this amendment provides welcome and necessary relief, it is a narrow, surgical fix. The fundamental risk for funding organic growth by subscribing for new shares remains unresolved. This creates a strategic dilemma, as the legislative change de-risks expansion through acquisition while leaving investment in new greenfield projects exposed to significant tax uncertainty. This forces investors to consider alternative funding, such as shareholder debt. However, shareholder debt is also heavily constrained by anti-avoidance rules, including transfer pricing (section 31) and limitations on interest deductibility (section 23M). Therefore, careful long-term capital planning and continued advocacy for more comprehensive reform are essential to align the legislation with sound economic policy.
