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What are the Vat implications when it comes to issuing company shares?

by , 13 June 2014
When a company is formed, or when it wants to increase its capital, it can issue shares.

While the Companies Act defines shares as 'moveable property', the shares actually represent the rights and obligations of the company and the people who subscribe to them. These are mainly the right to receive dividends and share in the capital of the company upon liquidation.

Now the big question is: Are there any Vat implications when it comes to shares?

Read on to find out the answer so you can comply with Vat law.

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Does Vat come into play when it comes to shares?

The Practical Vat Loose Leaf Service defines equity security as any interest or right to a share in the capital of a company, a close corporation, a body corporate or a trust.

Because this (equity security) is a right to share in profits, rather than goods and services generally subject to Vat, the company issuing the shares doesn't make a taxable supply, but an exempt supply.

The member of a close corporation investing money in his member's interest is a similar position. This means the sale of the rights to share in profit (i.e. your shares) is exempt from Vat and you can't claim input tax.

Sound complicated? This example will clear things up…

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Here's an example that shows how Vat works when it comes to company shares

Mr Jolly Gee discovers emeralds in Limpopo and needs R100 million in capital to develop the mine. He advertises in the newspapers for investors to subscribe for 20 million shares of R5 each. He lists the shares on the Johannesburg Securities Exchange. The subscribers hope to share in the profits of the company.

This means he isn't supplying goods or services in the normal sense. As a result, he won't charge Vat on the R100 million he receives.

The implications are that he can't claim input tax on his expenses relating to the issue of the shares, because this Vat relates to an exempt activity for Vat purposes.

There you have it. Issuing shares is an exempt supply. Make sure you comply now that you know the Vat implications.

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