For years, the South African securities lending industry has been lobbying for an exemption from securities transfer tax (“STT”) for the outright transfer of listed equity securities as collateral. Taxand South Africa explores the impact of this update.
On 8 January 2016, the Taxation Laws Amendment Act 25 of 2015 was promulgated, which includes the long-awaited introduction to the Securities Transfer Tax Act 25 of 2007 (the “STT Act”) of such an exemption. This is very good news for the South African securities lending market and others, but parties will need to clear a few hurdles before availing themselves of the exemption.
Market participants will likely be familiar with the existing STT exemption for securities lending arrangements. The definition of a “lending arrangement” in the STT Act has always required, amongst other things, that lent securities be returned to the lender within 12 months of transfer; that lent securities be on-delivered by the borrower within 10 business days; and that the lender be compensated for any dividends paid on the lent securities during the term of the loan.
The new STT exemption for “collateral arrangements” generally tracks the requirements of the lending arrangement exemption, except in that collateral securities need not be on-delivered. It should be noted, however, that in order for an outright transfer of equity securities collateral to qualify for the new exemption, certain technical requirements must be met in the transaction documentation.
Parties availing themselves should note that, like the lending arrangement exemption, the collateral arrangement exemption falls away if the collateral securities are not, in fact, returned within the 12-month period. The consequence is that should the secured party keep the collateral for any reason (default or agreement), the transfer of the collateral will not have been exempt, and STT will become due, together with interest and penalties.