The scheme paragraph 43A exists to stop
Dividends between South African companies are generally exempt from income tax (s 10(1)(k)(i)) and from dividends tax (the resident-company exemption). Sensible policy — profits should not be taxed again every time they move up a corporate chain. But it created a famous arbitrage at the point of sale.
Instead of selling shares for R100 million (a taxable capital gain), the target first declares a R95 million dividend to the corporate seller — exempt — and the buyer then pays R5 million for the hollowed-out shares. Often the buyer itself funds the dividend by subscribing for new shares in the target. Same money, same exit; almost no CGT. That subscription-and-buyback family of schemes became so common that such arrangements can be reportable arrangements under the Tax Administration Act’s public notice, where the notice’s factual and monetary requirements are met. Paragraph 43A is the legislature’s answer: past a threshold, pre-sale dividends are not really dividends — they are the price.
Step 1 of 4 · The setup
The charging rule
“…where a company holds shares in another company and disposes of any of those shares in terms of a transaction that is not a deferral transaction and that company held a qualifying interest in that other company at any time during the period of 18 months prior to that disposal, the amount of any exempt dividend received by or that accrued to that company in respect of the shares disposed of must— (a) to the extent that the exempt dividend constitutes an extraordinary dividend; and (b) if that company immediately before that disposal held the shares disposed of as a capital asset (as defined in section 41), be taken into account as part of the proceeds from the disposal of those shares…”
Unpack the elements. The rule hits companies selling shares (individuals and trusts selling directly are outside para 43A — though s 22B mirrors it for shares held as trading stock, and other rules police natural persons). The seller must have held a qualifying interest at some point in the prior 18 months — for an unlisted target, at least 50% of the equity or voting rights, or 20% where no one else holds a majority; for a listed target, 10%. And the dividends added back are only the exempt, extraordinary ones. Ordinary distributions of profits along the way remain untouched — the rule aims at exit-flavoured extractions, not dividend policy.
What counts as an “extraordinary dividend”
“‘extraordinary dividend’, in relation to— … (b) any other share, means so much of the amount of any dividend received or accrued— (i) within a period of 18 months prior to the disposal of that share; or (ii) in respect, by reason or in consequence of that disposal, as exceeds 15 per cent 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:”
So the test is mechanical: take the 18 months before disposal (plus anything paid because of the disposal, whenever paid), total the exempt dividends on the shares sold, and compare them to 15% of the share value (the higher of the two measurement dates). The excess is “extraordinary” and lands in proceeds. Preference shares have their own yardstick — dividends above a 15% per-annum rate on the issue price.
Two calibrations to note. The proviso excludes dividends in specie distributed under an unbundling (s 46(1)(a)) or liquidation distribution (s 47(1)(a)) — those distributions are the roll-over working as intended, not a strip. And SARS’s Interpretation Note 126 works through the definitions, the measurement dates and the interaction with the corporate rules with examples — essential reading before any pre-sale dividend is declared.
How para 43A chains through roll-over transactions
Here is where dividend stripping becomes a corporate-rules subject rather than a general one. Paragraph 43A defines a “deferral transaction” as one to which Part III (ss 41–47) applied. Two consequences follow.
First, a disposal by way of a deferral transaction does not itself trigger the add-back — the charging rule only fires on a disposal “that is not a deferral transaction”. You can still restructure under ss 42–47 after receiving dividends; the reckoning waits for the real exit.
Second — and this is the trap — the history travels with the shares:
“Where a company holds shares in another company and disposes of any of those shares in terms of a transaction that is not a deferral transaction within a period of 18 months after having acquired those shares in terms of a deferral transaction, other than an unbundling transaction and— (a) within a period of 18 months prior to the disposal of those shares by that company an exempt dividend in respect of those shares accrued to or was received by a person that— (i) disposed of those shares in terms of a deferral transaction; and (ii) was a connected person in relation to that company … that dividend must for purposes of this paragraph be treated as a dividend that accrued to or was received by that company…”
In plain terms: you cannot wash a dividend-stripped share clean by first rolling it to a connected group company under s 42 or s 45 and selling from there. The new holder inherits the old holder’s dividends (and, where new shares replaced old shares in the roll-over, dividends on the old shares count against the new ones). The 18-month dividend history must be checked across the whole chain of roll-overs, not just in the hands of the final seller.
Deemed disposals: dilution counts too
The early versions of para 43A were dodged by not selling at all: the target simply issued new shares to the incoming “buyer”, diluting the seller to a sliver — economically an exit, legally no disposal. Paragraph 43A(4) closes this: where the target issues shares to someone else and the company’s effective interest is reduced, the company is treated as having disposed of that percentage of its shares, and the extraordinary-dividend add-back runs on that deemed disposal. A subscription that dilutes you from 100% to 5% is, for this paragraph, a 95% sale.
The other 18-month rules in the corporate rules
Para 43A’s 18-month window is one strand of a wider web — but the strands are separate rules with separate triggers and consequences, not one universal “probation period”. Inside Part III itself: s 42(5) (income treatment where shares from an asset-for-share deal are sold early and the rolled-in assets were mostly trading stock or allowance assets), s 42(7), s 44(5), s 45(5) and s 47(4) (quarantining of pre-existing gains where the asset is on-sold within 18 months), and s 47(3A)(b) (recent debt assumed in a liquidation). Sections 43 and 46 carry no equivalent early-disposal rule. The practical discipline is the same either way: diarise every roll-over date and check the specific rule for the section used before any disposal or distribution — the calendar is doing legal work.
Company AF: the GAAR backstop
Paragraph 43A in its current form applies to disposals on or after 19 July 2017. For schemes implemented before that, SARS has not been without remedies. In Company AF (Pty) Ltd and Others v CSARS [2026] ZATC 6, shareholders had rolled their operating-company shares into personal investment companies under s 42, then exited in 2017 via the classic strip: a R274.7 million pre-sale dividend funded by the purchaser’s R280.3 million subscription, followed by a sale of the old shares for R1,000. Para 43A did not apply on timing — so the Commissioner deployed the GAAR, and the Tax Court agreed, finding the arrangement abnormal, lacking commercial substance and a misuse of the dividend exemption:
The judgment’s message for anyone contemplating a dividend-flavoured exit: the specific anti-avoidance rule and the general one are a layered defence. Falling outside para 43A’s dates or definitions does not make a strip safe — the GAAR remains available wherever its own statutory requirements (a tax benefit, the purpose element and a tainted element) are met, as they were in Company AF. The fuller story, including the penalty findings, is in What the Courts Actually Say.
Worked example · the Nkosi family
Frequently asked questions
Extracting a company’s value as tax-exempt dividends shortly before selling its shares, so the sale price — and the taxable capital gain — shrinks. Paragraph 43A of the Eighth Schedule reverses the trick for corporate sellers by adding “extraordinary” pre-sale dividends back into the proceeds; s 22B does the same where the shares are held as trading stock.
No. Only exempt dividends that are extraordinary — for ordinary shares, the portion exceeding 15% of the higher of the share’s market value at the start of the 18-month window and at disposal — and only where the corporate seller held a qualifying interest in the 18 months before disposal. Normal-course dividends within the 15% band pass through untouched, as do unbundling and liquidation distributions in specie under ss 46 and 47.
No — the opposite. A roll-over (“deferral transaction”) postpones the reckoning but carries the dividend history to the new holder: para 43A(3) treats a connected predecessor’s exempt dividends as the new holder’s own when the shares are sold outside Part III within 18 months, including dividends on old shares that were swapped for new ones. Check the dividend history across the whole roll-over chain before any exit.
That is the textbook pattern — a share subscription followed by a buy-back or exit can be a listed reportable arrangement where the public notice’s factual and monetary requirements are met (check the current notice; the disclosure deadlines are short), para 43A will convert the extraordinary portion of the dividend into proceeds for a corporate seller, and Company AF shows the GAAR catching variants that slip the specific rule where its own requirements are satisfied. Price the deal as a sale and let the dividends be ordinary — or take advice before signing anything.
Para 43A applies to companies disposing of shares. A trust selling shares directly is outside it — but a company held by the trust is squarely inside, and other rules (including the GAAR and the attribution rules) still watch trust-level extractions. The safe assumption in any structure with a corporate layer: the 18-month dividend test applies somewhere in the chain.
Before signing
Roll-over relief and the dividend rules depend on the exact parties, shareholdings, values, measurement dates, consideration and the order of steps. Obtain transaction-specific tax and legal advice before agreements or resolutions are signed — a later correction may not restore the position.