South Africa: Change in VAT treatment of “scrip-lending transactions”

SARS now considers scrip-lending transactions to constitute the provision of credit.

SARS now considers scrip-lending transactions to constitute the provision of credit.

The South African Revenue Service (SARS) in December 2022 issued a draft binding general ruling (draft BGR), which will replace practice note 5 (which deals with the income tax and value added tax (VAT) treatment with respect to “scrip-lending transactions”), effective 1 April 2023.

Under the draft BGR, SARS now considers scrip-lending transactions to constitute the provision of credit. SARS further considers that since the scrip-lending fee does not relate to any other service forming part of the scrip-lending transaction, but solely for the use of the securities, the scrip-lending fee is also an exempt financial service.

The change in interpretation by SARS is consistent with a recent binding private ruling issued by SARS dealing with the VAT treatment of gold loans.


Practice note 5 (PN 5) issued by SARS in 1999 dealt with the income tax and VAT treatment in respect of scrip-lending transactions.

Scrip-lending involves the lending of shares and other to a borrower, who agrees to return the same quantity of similar securities to the lender on an agreed future date. Despite the term “lending,” ownership in the securities transfers to the borrower, with the result that the borrower takes the risk and/or benefit in the price fluctuation of the securities and is entitled to any dividends which may be declared in respect of such securities for the period of the loan. Lenders generally charge a scrip-lending fee to the borrower and the loan agreement most often provides that the borrower also needs to pay any dividends or interest accrued to it to the lender (i.e., so-called manufactured dividends or manufactured interest). Because scrip lending is not without risks, the loan agreement typically requires that the borrower provides collateral to the lender and the borrower is generally entitled to receive interest from the lender on the collateral provided.

From a VAT point of view, PN 5 provides that the scrip-lending transaction is a deemed financial service in terms of sections 2(1)(c) or (d) or (f) of the VAT law, depending on the nature of the securities, with the result that the transfer of ownership in the securities, manufactured dividends and manufactured interest are exempt from VAT in terms of section 12(a) of the law. However, since the proviso to section 2(1) provides that the activities contemplated in sections 2(1)(c), (d) and (f) are deemed not to be financial services to the extent that the consideration payable in respect thereof is any fee, commission, merchant’s discount or similar charge, PN 5 provides that the scrip-lending fee is subject to VAT.

Read a January 2023 report [PDF 257 KB] prepared by the KPMG member firm in South Africa


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