Provisional Taxpayer Alert: The Tax Implications of Naspers’ Listing of Prosus

On 11 September 2019, Naspers Limited (“Naspers”) successfully listed its international investments, through a newly-established company called Prosus N.V (“Prosus”), on the Euronext Amsterdam Exchange. Without delving into the depths of this auspicious transaction, which sees Naspers unlocking value for its shareholders, this article will provide our readers with an insight into the tax implications of the Prosus listing for Naspers shareholders.
 
Shareholders of Naspers were Presented with Two Options:
 
Option 1 (The default option): Naspers issues a current shareholder with Naspers M shares for no consideration (The Naspers M share would constitute a capitalisation share). For every one Naspers share held, a shareholder would receive one Naspers M share. Upon the listing of Prosus, each Naspers M share would automatically be exchanged for one Prosus share.
 
Option 2: Naspers issues a current shareholder with Naspers shares. For every one Naspers share held, a shareholder would receive an additional 0.36986 Naspers shares. Fractions would be rounded down to the closest whole number and the remaining fractional entitlements would be paid in cash.
 
If a shareholder, or the shareholder’s proxy (such as a financial advisor etc.), did not specifically elect Option 2, the default option (i.e. Option 1) would be executed on behalf of the shareholder. Although the option may not have been exercised directly by the shareholder, it is important for a shareholder to understand the tax implications of Option 1.
 
The Tax Implications are as Follows:
 
Option 1: The receipt of the Naspers M capitalisation shares has no tax implications for shareholders, as “capitalisation shares” are specifically excluded from the definition of “dividend” in section 1(1) of the Income Tax Act No.58 of 1962 (“the Act”). The Naspers M shares would have a nil base cost for capital gains tax (“CGT”) purposes in the hands of the shareholder.
 
However, the exchange of Naspers M shares for Prosus shares would constitute a “disposal” for CGT purposes. The proceeds of the disposal of Naspers M shares would be equal to the value at which the Prosus shares listed (Prosus listed at R 1,238 per share). South African resident shareholders of Naspers M shares would therefore need to consider the impact of this CGT event for their provisional tax estimates for the current tax year of assessment (ending on 28 February 2020 in the case of individuals and trusts).
 
If one Naspers M share was exchanged for one Prosus share, the tax implications would be as follows for a resident natural person who is taxed at the maximum marginal tax rate:
 
Proceeds R 1 238
Base Cost R 0
Capital Gain* R 1 238
   
Taxable capital gain (40% inclusion rate) R 495.20
Tax liability (taxed at 45%) R 222.84
 
(*For illustrative purposes the annual exclusion for natural persons of R 40,000 per year was not taken into consideration.)
 
Option 2: Similar to Option 1, the receipt of the 0.36986 Naspers shares for every one Naspers share held will not result in any immediate tax implications, as capitalisation shares issued are not included in the definition of “dividend” per the Act. Option 2 entails no further steps to the transaction and accordingly, no tax implications are noted for shareholders who opted for Option 2.
 
It must, however, be noted that the additional 0.36986 Naspers shares are deemed to be acquired at a nil base cost, which in turn lowers the weighted average base cost per Naspers share that a shareholder holds in his/her investment portfolio. If Option 2 was selected by a shareholder, the CGT event is therefore merely delayed until such time that the Naspers shares are disposed of by the resident shareholder.
 
We advise our clients that held Naspers shares in their investment portfolios at the time of the Prosus listing to approach their local Moore firms to obtain advice as to how the transaction could influence their provisional tax estimates for the current tax year of assessment, in order to avoid underestimation penalties. In particular, if Prosus shares were acquired by the taxpayer (the default option if the taxpayer did not specifically elect the option to receive additional Naspers shares), a capital gain has been triggered in the hands of the taxpayer. This capital gain must be taken into account in the taxpayer’s provisional tax estimates.