A relatively unknown piece of legislation could be an ace up the sleeve of the South African Revenue Service as it tries to catch shareholders who hide behind a company to avoid paying their taxes, according to a new study conducted at Stellenbosch University.

The study was done by Dr Albertus Marais as part of his doctoral thesis in Mercantile Law.

Piercing the corporate veil doesn't mean that the company's existence is being cancelled, but rather that its existence is ignored for a specific enquiry only, for instance the determination of tax consequences.

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Marais notes that shareholders may use the corporate veil to avoid taxes by transferring shares held by an individual or a trust to a company of which the individual or trust is a shareholder.

In this way, dividend tax of the underlying share portfolio is avoided, since South African companies, as shareholders, are typically exempt from dividend tax on dividends declared to them.

"For income tax purposes in particular it may be beneficial for individuals to involve companies or layered company structures in transactions due to the beneficial regimes that the Income Tax Act affords companies," says Marais.

Creating awareness

He adds that it is important to create awareness about the potential application of Section 20(9), because the Income Tax Act's broad and powerful general anti-avoidance rules do little to address this problem.

"Tax avoidance is a distinctly grey area and the line between permissible and impermissible avoidance is far from clear," says Marais.

"Hopefully this study will contribute to making that distinction slightly clearer, especially where tax planning through the use of companies is involved."