South African dividends: a legal roadmap

Section 46 of the South African Companies Act of 2008 provides that a company must not make any proposed distribution, which includes the payment of a dividend, unless the distribution is either pursuant to an existing legal obligation or a court order, or it has been authorised by the board by resolution.  The company must satisfy the solvency and liquidity test immediately after completing the distribution and the board must, by resolution, acknowledge that it has applied the solvency and liquidity test and reasonably concluded that the company will satisfy it immediately after the distribution. 

A company satisfies the solvency and liquidity test at a particular time if, having regard to all reasonably foreseeable financial circumstances at that time:

• the assets, as fairly valued, equal or exceed the liabilities, as fairly valued.  If the company is a member of a group of companies, this comparison is made on an aggregate group basis (aggregate assets vs aggregate liabilities), each as fairly valued;
• it appears that the company will be able to pay its debts as they fall due in the ordinary course of business for a period of 12 months: (1) after the date on which the test is considered; or(2) in the case of certain “distributions”, 12 months after that distribution.

As far as the liquidity limb of this test is concerned, a company would normally prepare a cash flow projection that would indicate the projected inflow of cash, as well as the expected source of such cash over the next twelve months as well as the projected outflow of cash, with the expected nature of such outflow over the next twelve months.

Section 4 prescribes how the test is to be applied, including that any financial information considered must be based on accounting records compliant with section 28 and financial statements compliant with section 29.  The board (or other person applying the test) must consider a fair valuation of the company’s assets and liabilities, including reasonably foreseeable contingent assets and contingent liabilities, whether or not they arise because of the proposed distribution (and may also consider other valuations that are reasonable in the circumstances).  Section 46 deals with timing and staleness of the solvency and liquidity assessment.  Once the board has made the acknowledgement resolution under section 46(1)(c), the distribution must be fully carried out.  If it is not completed within 120 business days, the board must reconsider the solvency and liquidity test for the remaining distribution and the company must not proceed unless the board makes a further acknowledgement resolution. 

Any dividend that is declared and paid by a company in South Africa is subject to a 20% withholding tax. The dividend may be exempt from the withholding if it is paid to another South African company or it may be subject to a reduced rate of withholding if paid to a foreign shareholder. Where this is the case, the shareholder would be required to provide the company with a declaration and undertaking confirming that the dividend is either exempt from the withholding or is subject to a reduced withholding.  The general principle is that interest paid on loan funding that is directly applied to finance a dividend payment is not tax deductible in the hands of the borrowing company.  For exchange control purposes, any share certificate that has been issued to a non-resident shareholder must be endorsed “non-resident”.  The failure to endorse the share certificate will mean that any dividends that are declared and paid on such shares to the foreign shareholder may not be remitted from South Africa.