Crumbs for the taxman after Naspers's Tencent sale
There will be minimal capital gains tax due, thanks to SA law on local and international investors
Naspers may have scored billions of rands in profit on the sale of a portion of its 17-year-long investment in Tencent, but the South African taxman will see little benefit.
Given the spectacular surge in the value of Tencent since Naspers acquired the shares in 2001, almost all of the $9.8-billion yielded by the sale of 2% of Tencent represents a capital gain. However, because the bulk of the shares are being sold to international investors there will be minimal capital gains tax due.
South African tax laws require Naspers to pay capital gains tax only on the Tencent shares that were sold to South African investors.
The company has not revealed to whom the shares were sold but according to media reports investment bankers at Bank of America Merrill Lynch, Citigroup and Morgan Stanley were offering the shares to international institutional investors.
In terms of South African tax law a South African company that owns more than 10% of a foreign company does not have to pay tax on any profit made selling that foreign company’s shares as long as the purchaser is a foreign entity.
Keith Engel, CEO of the South African Institute of Tax Professionals, explains that the exemption was introduced about 15 years ago to ensure consistent treatment of dividend income and profit from share sales.
“At the time dividends from offshore operations were exempt from tax and it was argued that capital gains on share sales should also be exempt as the capital gain was equivalent to the value of future dividends,” said Engel.
Weakness and jitters
Meanwhile, the Naspers share price has continued to weaken in line with Tencent, which has seen its share price drop 12.6% from a high of $468.6 (Hong Kong) on March 15 to $409.6 at the close of trade last week. The weakness in the Tencent share price is attributed to disappointing 2017 results and the company’s announcement that it planned to ramp up acquisitions and investments.
News of Naspers’s sale also caused some jitters.On Thursday Naspers closed 1.37% weaker at R2,891.84. It has dropped 16% since it announced the sale of the 190 million Tencent shares. This means the value discount between the two entities has grown rather than diminished since the sale.
Local analysts attribute Naspers’s weakness to disappointment about plans for the $9.8-billion income and the prospect that some of it will be invested into poorly performing e-commerce ventures.
Group CEO Bob van Dijk has said the additional money will allow Naspers to scale quicker and reach profitability sooner.
For the shareholders who have been pushing for action to close the discount, the share sale has been described as “a good start”.