The tax implications of holding shares as a nominee

A company’s issued shares may be held by, and registered in the name of one person (“nominee”), for the beneficial interest of another person (“beneficial owner”). The South African Revenue service (“SARS”) has released a new Binding Private Ruling 370 (“ruling”) on the tax implications when the shares are de-registered from the nominee’s name and registered in the name of the beneficial owner.

The facts presented to SARS for the purpose of its ruling were that both the nominee and the beneficial owner of the shares were natural persons who resided in South Africa. The beneficial owner of the shares needed a property from which he could conduct his business. He arranged with his attorney for the property to be purchased in the name of one of the attorney’s employees. The attorney and employee acted as a nominee in the acquisition and registration of the property.

The property was later transferred to a company and the shares in that company, like with the property, were held in the name of an employee of his attorney on behalf of the beneficial owner.

During the time when the property and later the shares, were held by the nominee, the beneficial owner had complete control of the property. He funded and maintained the property, paid all rates and taxes on the property, and incurred all the costs of renovations and extensions. In other words, despite the shares of the property-owning company being in the name of the nominee, the beneficial owner had possession and control of the property since its acquisition.

SARS ruled that the registration of the shares in the name of the beneficial owner and the contemporaneous deregistration of the shares from the name of the nominee would not constitute a disposal for capital gains tax purposes. Furthermore, the transaction would not constitute a donation or deemed donation that would trigger donations tax. Given that there was no transfer of shares, no securities transfer tax would become payable on the transaction. Similarly, the provisions that cause transfer duty to be payable when there is a change of ownership in a property-owning company would not apply.

It is important to be able to demonstrate that the beneficial owner, and not the nominee, held a beneficial interest in the shares.  This could be in the form of an agreement giving the beneficial owner the right to dividends, voting rights, or the right to sell the shares. Without being able to demonstrate a beneficial interest, the change of registered shareholder could be seen as a sale or donation that triggers tax.

Graeme Palmer

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Contributing Advisors