A share buyback is the company repurchasing its own shares from a shareholder. It requires a board resolution and the board must be satisfied the company will pass the solvency and liquidity test immediately afterwards. Repurchasing from a director or a related person requires a special resolution of shareholders, and larger repurchases bring in further requirements. It is how a departing shareholder gets paid out without the remaining shareholders funding it from their own pockets.
That last point is the whole commercial argument, and it is the one small companies most often miss.
Why it beats the alternative
A co-founder wants out and their stake is worth R600,000.
The usual route: the remaining shareholders buy the shares personally. They have to find R600,000 of after-tax personal money — which, at higher marginal rates, means earning well over a million to get there.
The buyback route: the company buys the shares using company money. The departing shareholder is paid, the shares are dealt with, and nobody has to extract cash personally to fund it.
The remaining shareholders' proportional holdings increase automatically, because there are fewer shares in issue. Two shareholders at 40% each after a 20% buyback hold 50% each — without either of them paying anything.
That is a materially better outcome than a personal purchase, and it is available to any solvent company.
What the Act requires
A board resolution. The board decides on the repurchase.
The solvency and liquidity test. The board must be satisfied that, immediately after the repurchase, the company will satisfy the test — broadly, that its assets fairly valued equal or exceed its liabilities fairly valued, and that it appears the company will be able to pay its debts as they fall due for the next twelve months.
Record that you applied it. The test is a board judgement. Minute the assessment and the information relied on, because if the company later fails, that record is what defends the directors. See a director's duties under the Companies Act.
A special resolution where the repurchase is from a director or prescribed officer, or a person related to one. In a small company this is usually the case, so plan for the shareholder vote rather than assuming a board resolution is enough.
Additional requirements apply to larger repurchases — a repurchase above a prescribed proportion of a class of shares brings in the requirements applying to fundamental transactions, including shareholder approval and appraisal rights. Take advice where the buyback is substantial.
Check the MOI. It may restrict or add conditions.
What happens to the shares
Shares reacquired by the company do not stay in issue. They revert to the status of authorised but unissued shares, available to be issued again later.
Update the securities register to reflect the repurchase, and cancel the certificate. This is the step that gets missed, and it is the one that matters when someone later asks who owns what. See how to issue shares to a new shareholder.
Update beneficial ownership at CIPC within the required period, because the percentage holdings of everyone remaining have just changed. See do you have to update beneficial ownership every year.
The tax, which is not obvious
A buyback is generally treated as a dividend to the extent that the payment exceeds contributed tax capital returned. That means dividends tax at 20%, withheld by the company.
Where the payment is a return of contributed tax capital, the treatment differs and capital gains tax consequences arise for the shareholder instead.
The split between the two matters and it depends on the company's contributed tax capital position and how the transaction is structured.
Get tax advice before you sign anything. The difference between a well-structured buyout and a poorly structured one is real money, and it cannot be fixed retrospectively.
Securities transfer tax may also apply.
When a buyback is the right tool
A shareholder is leaving and the remaining shareholders want their stake without funding it personally.
A shareholder has died and the estate needs to be paid out — often funded by buy-and-sell assurance taken out for exactly this. See what happens when a director or shareholder dies.
A relationship has broken down and a clean separation is worth more than continuing.
The company has surplus cash and buying back is a better use than holding it.
When it is not
The company cannot afford it. If the solvency and liquidity test is marginal, do not do it. A buyback that pushes the company into distress exposes the directors personally.
The valuation is not agreed. "Fair value" with no formula is where these break down. Agree the mechanism in a shareholders' agreement before you need it.
A third party would pay more. Sometimes selling the stake externally is better for everyone, subject to pre-emptive rights.
Where the tax treatment has not been modelled. A buyback structured without advice can cost more than the personal purchase it was meant to avoid.
Do this in order
1. Read the MOI and any shareholders' agreement — restrictions, pre-emptive rights, valuation mechanisms.
2. Agree a price, ideally by the mechanism already written down.
3. Get tax advice on the dividends tax and contributed tax capital treatment.
4. Apply the solvency and liquidity test properly, on current numbers.
5. Pass the board resolution, minuting the test and the reasoning.
6. Pass a special resolution where the seller is a director, prescribed officer or a related person.
7. Pay, and withhold dividends tax where it applies.
8. Update the securities register, cancel the certificate, and file beneficial ownership at CIPC.
9. Deal with the other relationships. A shareholder leaving is usually also a director and often an employee. Those are separate processes. See can shareholders remove a director.
Frequently asked questions
Can a private company buy back its own shares in South Africa? Yes. It requires a board resolution and the board must be satisfied the company will satisfy the solvency and liquidity test immediately after the repurchase. A special resolution is required where the repurchase is from a director, prescribed officer or a related person.
Why use a buyback instead of the other shareholders buying the shares? Because the company pays rather than the individuals. The remaining shareholders do not have to find after-tax personal money, and their proportional holdings increase automatically because fewer shares remain in issue.
What happens to shares the company buys back? They revert to the status of authorised but unissued shares, available to be issued again later. The securities register must be updated and the certificate cancelled.
Is a share buyback taxed? Generally yes. A buyback is largely treated as a dividend to the extent the payment exceeds contributed tax capital returned, attracting dividends tax at 20% withheld by the company. Where it is a return of contributed tax capital the treatment differs and capital gains tax consequences arise. Take advice before structuring it.
Does a buyback need shareholder approval? A board resolution is the starting point, but a special resolution of shareholders is required where the repurchase is from a director or prescribed officer or a related person — which in a small company is usually the case.
What is the solvency and liquidity test? Broadly, that immediately after the transaction the company's assets fairly valued equal or exceed its liabilities fairly valued, and that it appears the company will be able to pay its debts as they fall due for the next twelve months. The board must apply it and should record that it did.
Do I need to tell CIPC about a share buyback? The buyback itself is recorded in the company's own securities register rather than at CIPC, but beneficial ownership must be updated at CIPC because the remaining shareholders' percentages have changed.
The company can pay, and usually should
Most small-company buyouts are structured as a personal purchase because nobody realised the company could do it. That decision costs the remaining shareholders the tax on extracting the purchase price personally.
Smartbook handles the resolutions, the securities register and the beneficial ownership filing on a buyback, and works with your tax adviser on the dividends tax treatment before the money moves.
Get your share certificates and register sorted →
Last reviewed: 2 August 2026. Written by the Smartbook team — SAIPA and SAICA accredited, SARS registered tax practitioners. Share buybacks involve company law and tax consequences that depend on the specific facts, including contributed tax capital and the size of the repurchase — take legal and tax advice before implementing. General guidance, not advice on your circumstances.
Primary sources: Companies Act 71 of 2008 · CIPC · Income Tax Act 58 of 1962 · SARS