South Africa: GAAR applied to recharacterize tax-exempt dividends as taxable service fee income (court decision)
Main purpose for arrangement was to obtain tax-exempt dividends
The Tax Court held that the general anti-avoidance rules (GAAR) (sections 80A – L of the Income Tax Act 58 of 1962) applied to recharacterize alleged tax-exempt dividends received by the taxpayer, in connection with arranging transactions in which distributable reserves and secondary tax on companies credits were created and “sold” to third-party investors, as taxable service fee income.
The case is: Mr Taxpayer G v. Commissioner [2025] ZATC 12.
Tax Court decision
The court rejected the taxpayer’s argument that, in determining whether the arrangement gave rise to a tax benefit, no tax liability could arise from entering into the arrangement because no tax liability was anticipated prior to the scheme. Instead, the court held that when the impugned transaction results in the avoidance, postponement, or reduction of tax liability when compared to an appropriate alternative, a tax benefit arises.
The court further confirmed that determining the sole or main purpose of an arrangement was an objective test, in which all the relevant facts and circumstances regarding the transaction must be considered (including the subjective purpose of the taxpayer). The court concluded, considering the evidence, that the taxpayer’s sole or main purpose in entering into the arrangement was to obtain tax-exempt dividends.
Nonetheless, the court confirmed that a “tainted element” must be established for the arrangement to constitute an “impermissible avoidance arrangement,” as the mere fact that the transaction was entered into for the sole or main purpose of obtaining a tax benefit is insufficient. The court found that the arrangement exhibited both abnormality and non-arm’s length requirements, particularly considering the establishment of the scheme through journal entries and the unusual rights between the taxpayer and other parties within the scheme. Although only one tainted element is required, the court nevertheless also noted that the arrangement lacked commercial substance for the taxpayer, in light of the significant tax benefit generated without significant impact on the taxpayer’s business risks or net cash flows.
Read an October 2025 report prepared by the KPMG member firm in South Africa.