Corporate tax in South Africa

Summary

Corporate Income Tax Rate (%) 28 (a)
Capital Gains Tax Rate (%) 18.648 (b)
Branch Tax Rate (%) 28 (a)
Withholding Tax (%)
Dividends 15 (c)
Interest 15 (d) (e)
Royalties from Patents, Know-how, etc. 15 (e)
Services 15 (f)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward Unlimited (g)

a) The mining income of gold mining companies is taxed under a special for­mula, and the non-mining income of such companies is taxed at a rate of 28%. Special rules apply to life insurance companies, petroleum and gas producers and small business corporations. See Section B.

b) This is the effective rate. See Section B.

c) Dividend withholding tax (DWT) was introduced, effective from 1 April 2012. Previously, a tax known as the secondary tax on companies (STC) was levied at a rate of 10%. The DWT applies to dividends declared by South African-resident companies. Certain dividends are exempt from the withholding tax, such as dividends received by South African-resident companies and public benefit organizations. A decreased rate may apply under a double tax treaty. See Section B.

d) Interest withholding tax at a rate of 15%, which took effect on 1 March 2015, applies to nonresidents only. Certain interest income is exempt from this with­holding tax, such as interest with respect to government debt instruments, list ed debt instruments and debt instruments owed by banks. A reduced rate may apply under a double tax treaty.

e) The 15% rate applies to royalties paid (or due and payable) on or after 1 Jan­uary 2015. This withholding tax applies to nonresidents only. A reduced rate may apply under a double tax treaty.

f) Services withholding tax at a rate of 15%, which will take effect on 1 January 2017, will apply only to payments made to nonresidents with respect to South African-source services not otherwise subject to normal tax after taking into account tax treaties.

g) See Section C.

Taxes on corporate income and gains

Company tax. A residence-based tax system applies in South Africa. Companies are considered to be resident in South Africa if they are incorporated or have their place of effective manage­ment in South Africa.

South African-resident companies are taxed on their worldwide in come (including capital gains).

Under complex look-through rules, the foreign operating income of nonresident subsidiaries derived from “non-business establish­ment” operations in foreign countries is taxed in the hands of the immediately cross-border South African-resident parent company on an accrual basis (see the discussion on controlled foreign companies [CFCs] in Section E). The income of nonresident sub­sidiaries with business establishments in foreign countries is gen­erally exempt from the look-through rules. Dividends paid by foreign companies that are not CFCs are taxable unless the share­holding of the South African-resident recipient is 10% or more (see the discussion of foreign dividends in Dividends). The par­ticipation exemption amendment reducing the participation per­centage from 20% to 10% took effect on 1 April 2012.

Nonresident companies are taxed on their South African-source income only.

Tax rates. The basic corporate tax rate is 28%. Branch profits tax at a rate of 28% is imposed on South African-source profits of nonresident companies.

Secondary tax on companies and new dividend withholding tax. The secondary tax on companies (STC) has been abolished. It was effective until 31 March 2012. STC was imposed on the compa­ny, not on the shareholders, and was regarded as a tax on income. It was not similar to a withholding tax and consequently did not qualify for relief under dividends’ articles in treaties.

The STC was replaced by a withholding tax imposed at a rate of 15% on dividends declared on or after 1 April 2012. The tax is levied on dividends declared and paid by South African-resident companies or by foreign companies listed on the Johannesburg Stock Exchange (JSE). Dividend withholding tax is a tax levied on the recipient of a dividend.

The declaring company must withhold the tax from the dividend paid and pay the tax to the South African Revenue Service (SARS) on behalf of the recipient. In the case of a listed company, a regu­lated intermediary withholds the tax.

Dividends are not subject to the withholding tax if any of the fol­lowing circumstances exists:

  • The beneficial owner is a resident company.
  • The beneficial owner is a local, provincial or national govern­ment.
  • The beneficial owner is a specified tax-exempt entity.
  • The dividend is paid by a real estate investment trust or a con­trolled property company.
  • The dividend is paid to certain regulated intermediaries who in turn are liable to administer the tax on behalf of the declaring company.
  • The dividend is paid by a micro business, up to ZAR200,000.
  • The dividend is paid by a foreign company listed on the JSE to a nonresident beneficial owner.
  • The dividend is paid by a headquarter company.
  • The dividend is paid to a portfolio of a collective-investment scheme in securities.
  • The dividend is taxable in nature or was subject to STC.

A paying company may not withhold the dividends tax if the ben­eficial owner has supplied it with a written declaration stating the following:

  • It is exempt from the dividends tax.
  • It will inform the company when it is no longer the beneficial owner of the shares.

If the beneficial owner is a nonresident that wants to rely on a reduced dividends tax rate under a double tax treaty between South Africa and its country of residence, it must provide the company with a written declaration that the reduced rate applies and specified undertakings.

A dividend is any amount transferred or applied by a company for the benefit of its shareholders, whether by way of a distribution or as consideration for a share buyback, excluding the following:

  • Amounts that result in a reduction of the contributed tax capital of the company
  • Shares in the company
  • An acquisition by a listed company of its own shares through a general repurchase of shares in accordance with the JSE listing requirements

STC credits that were available to a company on 31 March 2012 were carried forward into the dividend tax regime for setoff against dividends in determining the net dividend subject to the tax. The STC credit was increased by dividends received after the introduction of the dividends tax from another company that had used its own STC credits when paying the dividends concerned and that had notified the recipient company of the amount of credits used. A company’s STC credits were available for a period of three years after the introduction of the dividends tax (that is, until 31 March 2015). Effective from 1 April 2015, STC credits of a company are deemed to be nil.

Special types of companies. Gold mining companies may elect to have their mining income taxed under a special formula, while the non-mining income of such companies is taxed at a rate of 28%.

Petroleum and gas production is taxed in accordance with the usual provisions of the Income Tax Act, as modified by a special schedule applicable to prospecting and development expenses, as well as to farm-ins. A fiscal stability regime can be agreed to with the Minister of Finance. The tax rate is capped at a maximum of 28% for both South African-resident and nonresident companies. Dividends tax need not be withheld from dividends paid out of oil and gas income, and interest withholding tax need not be with­held from interest paid with respect to loans used to fund oil and gas exploration and post-exploration capital expenditure.

Life assurance companies are subject to special rules that sepa­rate the taxation of policyholders’ and corporate funds and apply different tax rates to such items.

Small business corporations (SBCs) are taxed at the following rates on their taxable income:

  • 0% on the first ZAR73,650 of taxable income
  • 7% of the amount of taxable income exceeding ZAR73,650 but not exceeding ZAR365,000
  • ZAR20,395 plus 21% on taxable income exceeding ZAR365,000 but not exceeding ZAR550,000
  • ZAR59,245 plus 28% on taxable income exceeding ZAR550,000

To qualify as an SBC, a company must satisfy all of the following requirements:

  • Its gross income for the year must not exceed ZAR20 million.
  • Its shares must be held by individuals who do not hold interests in other companies (except for certain specified interests such as interests in South African-listed companies).
  • Its total personal service and investment income must not ex­ceed 20% of its gross income.
  • It is not an employment entity.

Capital gains. Capital gains derived by resident companies are subject to capital gains tax (CGT) at an effective rate of 18.648% (66.6% of the normal corporate tax rate).

Resident companies are subject to CGT on capital gains derived from disposals of worldwide tangible and intangible assets.

Nonresidents are subject to CGT on capital gains derived from disposals of fixed property (land and buildings) and interests in fixed property located in South Africa, and assets of a permanent establishment located in South Africa. An interest in fixed prop­erty includes a direct or indirect interest of at least 20% in a resident or nonresident company if, at the time of disposal of the interest, 80% or more of the market value of the assets of the company is attributable to fixed property located in South Africa that is held as capital assets.

A capital gain is equal to the amount by which the disposal pro­ceeds for an asset exceed the base cost of the asset. A capital loss arises if the base cost exceeds the disposal proceeds. Capital loss es may offset capital gains, and regular income losses may offset net capital gains. However, net capital losses may not offset regular income.

The base cost for an asset includes the sum of the following:

  • The amount actually incurred to acquire the asset
  • Cost of the valuation of the asset for the purposes of determin­ing the capital gain or loss
  • Expenditure directly related to the acquisition or disposal of the asset, such as transfer costs, advertising costs, costs of moving the asset from one location to another and cost of installation
  • Expenditure incurred to establish, maintain or defend the legal title to, or right in, the asset
  • Expenditure on improvement costs (if the improvement is still in existence)

The base cost is reduced by any amounts that have been allowed as income tax deductions. It is also reduced by the following amounts if such expenditure was originally included in the base cost:

  • Expenditure that is recoverable or recovered
  • Amounts paid by another person
  • Amounts that have not been paid and are not due in the tax year

Inflation indexation of the base cost is not allowed.

Special rules apply to the base cost valuation of an asset acquired before 1 October 2001. Subject to loss limitation rules, in princi­ple, a taxpayer may elect to use the market value of such asset on 1 October 2001 as the base cost of the asset (the asset must have been valued before 30 September 2004) or, alternatively, it may use a time-apportionment basis, which is determined by a for­mula, effectively splitting the gain between the components from before 1 October 2001 and after that date.

A disposal is defined as an event that results in, among other things, the creation, variation or extinction of an asset. It includes the transfer of ownership of an asset, the destruction of an asset and the distribution of an asset by a company to a shareholder. For CGT purposes, a company does not dispose of assets when it issues shares or when it grants an option to acquire a share or debenture in the company.

The proceeds from the disposal of an asset by a taxpayer are equal to the amount received by, or accrued to, the taxpayer as a result of the disposal less any amount that is or was included in the taxpayer’s taxable income for income tax purposes. If a company makes a dividend distribution of an asset to a shareholder, it is deemed to have disposed of the asset for proceeds equal to the asset’s market value.

Rollover relief is available in certain circumstances including destruction of assets and scrapping of assets.

All related-party transactions are deemed to occur at market value, and restrictions are imposed on the claiming of losses incurred in such transactions.

Corporate emigration, which occurs when the effective manage­ment of the company is moved outside South Africa, triggers a deem ed disposal at market value of the assets of the company, followed by a deemed dividend in specie.

Subject to certain exceptions, disposals of equity shares in foreign companies to nonresidents are exempt from CGT if the disposing party has held at least 10% of the equity in the foreign company for at least 18 months.

Administration. The Tax Administration Act, which took effect on 1 October 2012, governs the administration of most taxes in South Africa.

The tax year for a company is its financial year. A company must file its annual tax return in which it calculates its taxable income and capital gains, together with a copy of its audited financial state ments, within 60 days after the end of its financial year. Extensions of up to 12 months after the end of the financial year are usually granted. No payment is made with the annual return.

The tax authorities issue an official tax assessment based on the annual return. The company must pay the balance of tax due after deduction of provisional payments within a specified period after receipt of the assessment.

Companies must pay provisional tax in two installments during their tax year. The installments must be paid by the end of the sixth month of the tax year (the seventh month if the tax year begins on 1 March) and by the end of the tax year. The second payment must generally be accurate to within 80% of the actual tax for the year. A third (“topping up”) payment may be made within six months after the end of the tax year. If this payment is not made and if there is an underpayment of tax, interest is charg­ed from the due date of the payment. A 20% penalty is charged if the total provisional tax paid for the year does not fall within certain prescribed parameters.

Tax penalties fall into two broad categories, which are non­compliance (for which penalty amounts can range between ZAR250 and ZAR16,000) and understatement (for which pen­alty amounts can range between 5% and 200% of the shortfall).

An e-filing system allows provisional payments and tax returns to be submitted electronically.

Dividends

South African dividends. Dividends paid by South African-resident companies are generally exempt from mainstream tax in the hands of the recipients and, accordingly, recipients may not deduct expenses relating to the earning of these dividends, such as inter­est and other expenses incurred on the acquisition of their shares.

Foreign dividends. Foreign dividends are dividends paid by non­resident companies and headquarter companies. Most foreign dividends accruing to or received by South African residents are taxable. The following foreign dividends are exempt from tax:

  • Dividends paid by a foreign company to a South African resi­dent holding at least 10% of the equity and voting rights in the foreign company, unless the dividend paid by the foreign com­pany is deductible for purposes of determining its tax liability in that foreign country
  • Dividends paid by a CFC to a South African resident (subject to certain limitations)
  • Dividends paid by a listed foreign company that are not consid­ered distributions of assets in specie (a dividend in specie is a distribution to shareholders in a form other than cash)
  • Dividends paid by a foreign company to another foreign com­pany that is resident in the same country as the payer, unless the dividend paid by the foreign company is deductible for the pur­poses of determining its tax liability in that country

For foreign dividends that are not exempt, a rebate may be claim­ed by South African resident recipients. The rebate is limited to the amount of South African tax attributable to the foreign divi­dend. Any excess of the foreign tax over the allowable rebate may be carried forward for a period of seven years. The excess taxes are available for setoff against foreign-source income in subse­quent years (the calculation is done on a pooled basis).

A South African resident (company or individual) holding 10% or more of the equity share capital of a nonresident company is ex­empt from tax on dividends received form the nonresident com­pany with respect to those equity shares. The reduced participa­tion rate of 10% took effect on 1 April 2012 for companies and on 1 March 2012 for individuals and applies to dividends receiv­ed or accrued on or after that date.

Recipients of dividends that are not exempt are taxed on a for­mula basis.

Withholding tax. Dividend withholding tax at a rate of 15% is imposed, subject to applicable treaty rates. For further details, see Secondary tax on companies and new dividend withholding tax.

Foreign tax relief. In the absence of treaty relief provisions, unilat­eral relief is granted through a credit for foreign taxes paid on foreign income, foreign dividends, foreign taxable capital gains, or income attributed under the CFC rules (see Section E), limited to the lesser of the actual foreign tax liability and the South African tax on such foreign income. The credit may be claimed only if the income is from a non-South African source. Excess credits may be carried forward, but they are lost if they are not used within seven years.

A credit was previously available with respect to foreign taxes on income from a South African source. These credits could not be carried forward. This measure has been eliminated, effective from 1 Jan uary 2016.

Foreign taxes that cannot be claimed as a tax credit can generally be claim ed as a deduction from taxable income.

Determination of trading income

General. The assessment to tax is based on taxable income deter­mined in accordance with the Income Tax Act. Taxable income normally approximates profit calculated in accordance with Inter­national Financial Reporting Standards, before adjustment for specific allowances and nondeductible items.

To be eligible for deduction, expenditures must be incurred in the production of income and for purposes of trade, and must not be of a capital nature.

Prepayments of insurance, rent and certain other items may not be deducted in full in the tax year of payment unless either of the following applies:

  • The related service or other benefit is enjoyed within six months after the end of the tax year of payment.
  • The aggregate of such expenditure is less than ZAR100,000.

Nonresident companies are exempt from tax on South African-source interest income unless at any time during that year it car­ried on business in South Africa through a permanent establishment. Withholding tax on interest at a rate of 15% was introduced on 1 March 2015. Relief may be available in treaties.

Inventories. Inventory is valued at the lower of cost or net realiz­able value. Last-in, first-out (LIFO) is not an acceptable method of valuation for tax purposes. Appropriate overhead expenses must be included in the valuation of inventory. Special rules apply to construction work in progress. Consumable stores and spare parts are included in inventory.

Tax depreciation (capital allowances)

Industrial plant and machinery. New plant and machinery that is brought into use in a manufacturing or similar process by other businesses is depreciated at a rate of 40% in the first year and at a straight-line rate of 20% for the second, third and fourth years. Used machinery or plant used in such a process qualifies for a 20% allowance per year over five years. The same allowances apply to foundations for plant and machinery if they are built specifically for particular machines and have a useful life limited to the life of the relevant machine.

SBCs (see Section B) qualify for a 100% deduction of the cost of new or used plant or machinery that is first brought into use on or after 1 April 2001 in a manufacturing or similar process. For other plant or machinery of an SBC, the following allowances are granted:

  • 50% in the first year of use
  • 30% in the second year of use
  • 20% in the third year of use

Industrial buildings. A 5% annual straight-line allowance is grant­ed on the cost of the construction of, and improvements to, indus­trial buildings erected by a taxpayer. Purchased industrial buildings generally qualify for annual straight-line allowances on the pur­chase price paid, excluding the amount attributable to the land, at the following rates:

  • 2% if originally constructed before 1 January 1989
  • 5% if constructed during the period of 1 January 1989 through 30 June 1996
  • 10% if constructed during the period of 1 July 1996 through 31 March 2000
  • 5% if constructed after 1 April 2000

Hotels. Construction of and improvements to hotels qualify for a 5% straight-line allowance. However, capital expenditure on the internal renovation of hotels qualifies for straight-line deprecia­tion at an annual rate of 20%.

Urban renewal. The cost of erection of new buildings or renova­tion (including extension) of old buildings in certain depressed urban areas qualifies for allowances if the building is used by the taxpayer for the taxpayer’s own trade or is leased for commercial or residential purposes. If the building is new or significant exten­sions are made to an existing building, the allowance is 20% in the year of first occupation and 8% per year for the following 10 years. If a building is renovated and if the existing structural or exterior framework is preserved, the allowance is 20% per year for five years.

Renewable energy plant and machinery. Effective from 1 January 2016, costs incurred with respect to the acquisition and construc­tion of plant and machinery used in the generation of renewable energy qualify for allowances (based on certain criteria) at the following rates:

  • 50% in the first year of use
  • 30% in the second year of use
  • 20% in the third year of use

Other commercial buildings. An allowance of 5% of the cost is generally available on commercial buildings not qualifying for any of the above allowances.

Wear-and-tear allowance for movables. An annual “wear-and-tear” tax depreciation allowance on movable items may be calculated using the declining-balance method or the straight-line method, but the straight-line method is generally preferred by the revenue authority. The allowance may be claimed based on the value (gen­erally the cost) of movable non-manufacturing machinery and equipment used by the taxpayer for the purposes of its trade. Rates for the wear-and-tear allow ance are not prescribed by statute, but certain periods of depreciation are generally accepted by the tax authorities. The following are some of the acceptable periods of straight-line depreciation.

Asset Years
Aircraft (light passenger, commercial
and helicopters)
4
Computers (mainframe) 5
Computers (personal computers) 3
Computer software (mainframes)
Purchased 3
Self-developed 1
Computer software (personal computers) 2
Furniture 6
Passenger cars 5
Heavy duty trucks 3

Apportionment of the wear-and-tear allowances is required for assets acquired during the course of a year.

Any asset costing ZAR7,000 or less may be written off in the year of acquisition of the asset.

Special capital allowances. Subject to the approval of the Minis­ter of Science and Technology, the cost of developing and regis­tering patents, designs, copyrights or similar property, and related know-how and of discovering novel scientific and technological information qualifies for a 150% deduction in the year in which the costs are incurred.

The acquisition cost of patents, copyrights and similar property (other than trademarks) and of related know-how is deductible at a rate of 5% per year. The cost of designs is deductible at a rate of 10% per year.

The cost of goodwill and trademarks (acquired on or after 1 Janu­ary 2004) is not depreciable for tax purposes.

Deductions with respect to restraint of trade payments are allowed over the period of restraint, with a minimum period of three years.

A 10% annual allowance is granted for the cost of new and unused pipelines used for transportation of natural oil, gas and refined products.

A 5% annual allowance is granted for the following:

  • Water pipelines and electrical lines
  • Railway lines used for the transportation of persons, goods and other items

Other special capital allowances are provided for expenditures on ships and aircraft, hotel equipment, scientific research, employee housing, plant and machinery of small business corporations (see Section B), aircraft hangars, aprons, runways and taxiways, and solar, wind and tidal equipment for the generation of electricity, as well as for certain capital expenditures for mining and agricul­ture, which are deductible in full against mining and agricultural income.

Recapture. The amount of tax depreciation claimed on an asset may be recouped (recaptured) when the asset is sold. In general, the amount recouped is the excess of the selling price over the tax value, but it is limited to the amount of tax depreciation claimed.

Groups of companies. Companies in a group may not share their tax losses with other profitable companies in the group.

Special rules provide income tax and CGT relief for transactions between 70%-held group companies and between shareholders and their companies. These transactions include the following:

  • Asset-for-share transactions
  • Amalgamation transactions
  • Substitutive share-for-share transactions (this is a transaction between a person and a company in which the person disposes of an equity share in the form of a linked unit in the company and acquires an equity share other than a linked unit in the company)
  • Intragroup transactions
  • Unbundling transactions
  • Transactions relating to the liquidation, winding up and dereg-istration of companies

Relief for losses. Tax losses may not be carried back but may be carried forward indefinitely, provided there is trading in every tax year.

Foreign tax losses may be offset against foreign income only. If a foreign tax loss exceeds foreign income, the excess may be car­ried forward to offset foreign income in future years for an unlim­ited period.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Value-added tax, levied on supply of a wide
range of goods and services
Standard rate 14
Disposals of going concerns and
certain exports
0
Skills development levy, on remuneration 1
Securities transfer tax (stamp duty); levied on
the transfer of listed and unlisted securities
0.25

Miscellaneous matters

Foreign-exchange controls. Measures were introduced in the 1960s to stem the outflow of capital from South Africa and to ensure a measure of stability in currency markets.

Permission must be obtained from the South African Reserve Bank (SARB) for the remittance of management fees. Royalties are freely remittable if the license agreement has been approved by the SARB (see Debt-to-equity rules). South African compa­nies raising loan financing offshore must obtain the authorization of the SARB regarding the terms and conditions. Foreign-equity investments are not restricted but share certificates must be en­dorsed “nonresident” by the SARB.

Debt-to-equity rules. The tax law includes measures that counter thin capitalization by adjusting both the interest rate and the amount of a loan based on arm’s-length principles. These measures previously contained a debt-to-equity ratio safe harbor of 3:1. However, the tax authorities have moved away from this ratio to require each company to consider its debt-equity mix on an arm’s-length basis. In certain circumstances, the thin-capitalization rules do not apply to headquarter companies. In addition, new legisla­tion further limits deductions to an amount determined by a for­mula. This amount roughly equals 40% of taxable income (with adjustments largely intended to match cash flow, subject to a ceiling of 60%). The new limitation applies from 1 January 2015.

Transfer pricing. The South African tax law includes transfer-pricing provisions, which are based on the internationally ac­cepted principles of transfer pricing. These provisions allow the South African tax authorities to treat any term or condition of a cross-border related-party transaction differently, but only to the extent that the term or condition differs from those that would exist between unrelated parties. In addition, exchange control regu­lations discourage unreasonable pricing by requiring that many foreign contracts, such as license agree ments, be approved by the Department of Trade and Industry before payment is allowed.

Anti-avoidance legislation. In addition to transfer-pricing rules (see Transfer pricing), South African law contains general anti-avoidance provisions that target “impermissible tax avoidance arrangements.” Broadly, an impermissible tax avoidance arrange­ment is an arrangement that seeks to achieve a tax benefit as its sole or main purpose and was entered into in a manner that would not normally be employed for bona fide business purposes, lacks commercial substance or misuses or abuses other provisions of the tax law. The SARS has wide powers in determining the tax con­sequences of an impermissible tax avoidance arrangement.

Personal service companies. The interposition of a corporate entity (personal service company) to disguise employment income does not prevent the imposition of employee withholding tax on fees earned. These companies are taxed at a rate of 28% and may claim only certain deductions, such as salaries, legal expenses, bad debts, contributions by the employer to pension and provident funds and medical aids, tax depreciation, rental expenses, finance charges, insurance, repairs, and fuel and maintenance for assets. The ex­penses with respect to premises and assets are allowed as deduc­tions only if they are incurred wholly or exclusively for purposes of trade.

Controlled foreign companies. Legislation regulates the taxation of certain income of CFCs. Key aspects of the legislation are de­scribed below.

Net foreign income, including capital gains, derived by a CFC may be attributed proportionately to any South African-resident beneficial owner of the CFC (other than a headquarter company) that has an interest of 10% or more in the CFC. The net foreign income is calculated using South African tax principles, but gen­erally ignoring passive income flows between CFCs in a 70%-held group.

A company is considered to be a CFC if more than 50% of the participation or voting rights of the company is held directly or indirectly by South African residents. In determining whether a company is a CFC, the participation rights and voting rights of a headquarter company (see Headquarter companies) are ignored. In addition, for a foreign listed company or a collective-investment portfolio, any person who holds less than 5% of the participation rights of the foreign company is deemed not to be a resident un­less connected parties hold more than 50% of the participation rights or voting rights of the company. The CFC attribution rules do not apply to a resident if the resident (together with any con­nected person) holds less than 10% of the participation rights and voting rights.

A CFC’s income is not attributed to a South African resident to the extent that the income is effectively connected to a business op­eration carried on through a “foreign business establishment” (FBE). In broad terms, an FBE is a fixed place of business that is suitably equipped with on-site operational management, employ­ees, equipment and other facilities for the purpose of conducting the primary operations of the business and that is used for a bona fide business purpose and not for tax avoidance (the place of busi­ness may be located elsewhere than in the CFC’s home country). Several anti-avoidance exceptions exist with respect to the mea­sure described in this paragraph. Also, if the tax payable to a for­eign government equals at least 75% of the tax liability that would have arisen in South Africa, no income needs to be imputed into the resident’s taxable income.

See Section B for information regarding foreign attributable tax credits and carryforward rules.

Headquarter companies. The headquarter company regime was in­troduced to encourage foreign companies to use South Africa as their base for investing in Africa. Broadly, headquarter compa­nies are exempt from withholding taxes on dividends, interest and royalties.

A headquarter company is a South African-resident company that has elected to be treated as a headquarter company and that satis­fies all of the following conditions:

  • Each shareholder (alone or together with its connected persons, whether resident or nonresident) holds 10% or more of the equity shares and voting rights in the headquarter company.
  • At least 80% of the cost of the headquarter company’s assets (excluding cash) is attributable to investments in equity shares, loans or advances and intellectual property in nonresident com­panies in which at least a 10% equity interest is held.
  • If the gross income of the company exceeds ZAR5 million, at least 50% of that gross income must consist of rentals, dividends, interest, royalties, service fees received from foreign companies, or proceeds from the sale of equity shares or intellectual prop­erty in such foreign companies.

A headquarter company must submit an annual report to the Minister of Finance.

The CFC imputation rules do not apply to headquarter companies, unless 50% or more of its shares are held by South African resi­dents. As a result of this concession, the net income of the head­quarter company’s foreign subsidiaries is not taxed in its hands, but in the hands of the ultimate shareholders if they are South African residents.

Headquarter companies are also exempt from the transfer-pricing and thin-capitalization rules if they on-lend loan proceeds re­ceived from their offshore shareholders to their foreign subsidiar­ies in which they hold at least 10%. The transfer-pricing rules also do not apply to back-to-back royalties under licenses from nonresidents.

Treaty withholding tax rates

The rates reflect the lower of the treaty rate and the withholding rate under domestic tax law.

Dividends (a)

%

Interest (b)

%

Royalties (c)

%

Algeria 10/15 (s) 0/10 (aa) 10 (e)
Australia 5/15 (t) 0/10 (aa) 5
Austria 5/15 (l) 0 0
Belarus 5/15 (l) 5/10 (bb) 5/10 (pp)
Belgium 5/15 (l) 0/10 (cc) 0 (e)
Botswana 10/15 (s) 0/10 (aa) 10 (e)
Brazil 10/15 (s) 10/15 (dd) 10/15 (j)
Bulgaria 5/15 (l) 0/5 (ee) 5/10 (i)
Canada 5/15 (t) 10 (ff) 6/10 (e)(f)
China 5 0/10 (gg) 7/10 (e)(g)
Congo (Democratic
Republic of) 5/15 (l) 0/10 (gg) 10 (e)
Croatia 5/10 (m) 0 5 (e)
Cyprus 0 0 0 (e)
Czech Republic 5/15 (l) 0 10 (e)
Denmark 5/15 (l) 0 0 (e)
Egypt 15 0/12 (hh) 15 (e)
Ethiopia 10 0/8 (ii) 20 (e)
Finland 5/15 (t) 0 0 (e)
France 5/15 (t) 0 0 (e)
Germany 7.5/15 (n) 10 (ff) 0 (c)
Ghana 5/15 (t) 5/10 (jj) 10 (e)
Greece 5/15 (l) 0/8 (ii) 5/7 (h)
Hungary 5/15 (l) 0 0 (e)
India 10 0/10 (gg) 10 (e)
Indonesia 10/15 (w) 0/10 (gg) 10 (e)
Iran 10 5 10 (e)
Ireland 5/10 (k) 0 0 (e)
Israel 15 15 0 (d)
Italy 5/15 (l) 0/10 (gg) 6 (e)
Japan 5/15 (x) 0/10 (gg) 10 (e)
Korea (South) 5/15 (l) 0/10 (gg) 10 (e)
Kuwait 0 0 10 (e)
Lesotho 15 10 10 (e)
Luxembourg 5/15 (l) 0 0 (e)
Malawi 15 15 0/15 (c)
Malaysia 5/15 (l) 0/10 (gg) 5
Malta 5 0/10 (gg) 10 (e)
Mauritius 5/10 (t) 10 5 (e)
Mexico 5/10 (k) 0/10 (kk) 10
Mozambique 8/15 (o) 0/8 (ii) 5
Namibia 5/15 (l) 10 10
Netherlands 5/10 (k) 0 0
New Zealand 5/15 (l) 0/10 (gg) 10
Nigeria 7.5/10 (r) 0/7.5 (ll) 7.5 (e)
Norway 5/15 (l) 0 0 (e)
Oman 0 0 0
Pakistan 10/15 (w) 0/10 (gg) 10 (e)
Poland 5/15 (l) 0/10 (gg) 10
Portugal 10/15 (y) 0/10 (gg) 10
Romania 15 15 15
Russian Federation 10/15 (z) 0/10 (gg) 0

 

Rwanda 10/20 (u) 0/10 (gg) 10
Saudi Arabia 5/10 (k) 5 10
Seychelles 5/10 (k) 0 0
Singapore 5/15 (t) 0 5 (e)
Slovak Republic 5/15 (l) 0 10
Spain 5/15 (l) 5 (mm) 5 (e)
Swaziland 10/15 (s) 0/10 (gg) 10 (e)
Sweden 5/15 (t) 0 0 (c)(e)
Switzerland 5/15 (q) 5 0
Taiwan 5/15 (t) 10 10 (e)
Tanzania 10/20 (v) 0/10 (gg) 10
Thailand 10/15 (s) 0/10/15 (nn) 15
Tunisia 15 0/5/12 (oo) 10
Turkey 10/15 (s) 0/10 (gg) 10
Uganda 10/15 (s) 0/10 (gg) 10 (e)
Ukraine 5/15 (q) 0/10 (gg) 10
United
Kingdom 5/10/15 (p) 0 0 (e)
United States 5/15 (t) 0 0 (e)
Zambia 15 15 15 (c)
Zimbabwe 15 15 15 (c)(qq)
Non-treaty countries 15 15 15

 

a) Effective from 1 April 2012, dividends are subject to withholding tax in South Africa at a standard rate of 15%, unless reduced by tax treaties as shown in the table above.

b) Interest withholding tax at a rate of 15%, which is effective from 1 March 2015, applies to nonresidents only.

c) In general, royalties are exempt from withholding tax if they are subject to tax in the recipient’s country. Otherwise, the rate is 12% until 31 December 2014, and 15%, effective from 1 January 2015. These rates may be reduced by tax treaties as shown in the table above.

d) In general, royalties are exempt if they are subject to tax in Israel. Otherwise, the rate is in accordance with South African domestic law, as discussed in footnote (c).

e) The rate applies only if the recipient is the beneficial owner of the royalties.

f) The 6% rate applies to royalties paid for copyrights of literary, dramatic, musical or other artistic works (excluding royalties with respect to motion picture films, works on film or videotape or other means for use in connec­tion with television broadcasting), as well as for the use of, or the right of use, computer software, patents or information concerning industrial, commercial or scientific experience (excluding information provided in connection with a rental or franchise agreement). The 10% rate applies to other royalties.

g) The 10% rate applies to royalties paid for copyrights of literary, artistic or scientific works, including cinematographic films, tapes, discs, patents, know-how, trademarks, designs, models, plans or secret formulas. The 10% rate applies to the “adjusted amount” of royalties paid (that is, 70% of the gross amount of royalties) for industrial, commercial or scientific equipment. This effectively provides a 7% rate on the gross royalties paid.

h) The 5% rate applies to royalties paid for copyrights of literary, artistic and scientific works. The 7% rate applies to royalties paid for patents, trademarks, designs, models, plans or secret formulas, as well as for industrial, commer­cial or scientific equipment.

i) The 5% rate applies to royalties paid for copyrights of cultural, dramatic, musical or other artistic works or for industrial, commercial and scientific equipment. The 10% rate applies to other royalties.

j) The 15% rate applies to royalties paid for the use of trademarks. The 10% rate applies to other royalties.

k) The 5% rate applies if the beneficial owner is a company that owns at least 10% of the shares. The 10% rate applies to other dividends.

l) The 5% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 15% rate applies to other dividends.

m) The 5% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 10% rate applies to other dividends.

n) The 7.5% rate applies if the beneficial owner is a company that owns at least 25% of the shares or voting power. The 15% rate applies to other dividends.

o) The 8% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 15% rate applies to other dividends.

p) The 5% rate applies if the beneficial owner is a company that owns at least 10% of the shares. The 15% rate applies to qualifying dividends paid by a property investment company that is a resident of a contracting state. The 10% rate applies to other dividends.

q) The 5% rate applies if the beneficial owner is a company that owns at least 20% of the shares. The 15% rate applies to other dividends.

r) The 7.5% rate applies if the beneficial owner is a company that owns at least 10% of the shares or voting power. The 10% rate applies to other dividends.

s) The 10% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 15% rate applies to other dividends.

t) The 5% rate applies if the beneficial owner is a company that owns at least 10% of the shares. The higher rate applies to other dividends.

u) The 10% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 20% rate applies to other dividends.

v) The 10% rate applies if the beneficial owner is a company that owns at least 15% of the shares. The 20% rate applies to other dividends.

w) The 10% rate applies if the beneficial owner is a company that owns at least 10% of the shares. The 15% rate applies to other dividends.

x) The 5% rate applies if the beneficial owner is a company that owns at least 25% of the voting shares of the company paying the dividends during the six-month period immediately before the end of the accounting period for which the distribution of profits takes place. The 15% rate applies to other dividends.

y) The 10% rate applies if the beneficial owner is a company that owns at least 25% of the shares for an uninterrupted period of two years before the pay­ment of the dividend. The 15% rate applies to other dividends.

z) The 10% rate applies if the beneficial owner is a company that owns at least 30% of the shares in the company paying the dividends, and holds a mini­mum direct investment of USD100,000 in that company. The 15% rate applies to other dividends.

(aa) The 0% rate applies to government institutions and unrelated financial in­stitutions. The 10% rate applies in all other cases.

(bb) The 5% rate applies to banks or other financial institutions. The 10% rate applies in all other cases.

(cc) The 0% rate applies to commercial debt claims, public financial institu­tions or public entities under a scheme for the promotion of exports, loans and deposits with banks and interest paid to the other contracting state. The 10% rate applies in all other cases.

(dd) The 10% rate applies to government institutions. The 15% rate applies in all other cases.

(ee) The 0% rate applies to government institutions. The 5% rate applies in all other cases.

(ff)      The 10% rate applies to government institutions.

(gg) The 0% rate applies to government institutions. The 10% rate applies in all

other cases.

(hh) The 0% rate applies to government institutions. The 12% rate applies in all

other cases.

(ii)      The 0% rate applies to government institutions. The 8% rate applies in all other cases.

(jj)      The 5% rate applies to banks. The 10% rate applies in all other cases.

(kk) The 0% rate applies to government institutions and interest paid on loans or

credits for periods of no less than three years that are granted, guaranteed or

insured by a financial or credit institution that is wholly government-owned.

(ll)      The 0% rate applies to government institutions. The 7.5% rate applies in all other cases.

(mm) The 5% rate applies to government institutions and interest paid on long­term loans (seven years or more) granted by banks or other credit institu­tions that are resident in a contracting state.

(nn) The 0% rate applies to government institutions. The 10% rate applies to fi­nancial institutions (including insurance companies). The 15% rate applies in all other cases.

(oo) The 0% rate applies to government institutions. The 5% rate applies to banks. The 12% rate applies in all other cases.

(pp) The 5% rate applies to royalties paid for the use of, or the right to use, in­dustrial, commercial or scientific equipment, or transport vehicles. The 10% rate applies in all other cases.

(qq) The exemption of royalties from tax in a contracting state if they are taxable in the other contracting state does not apply to an amount paid with respect to the operation of a mine, oil well or quarry or any other extraction of natural resources.

South Africa has ratified comprehensive tax treaties with Cam­eroon, Chile, Gabon, Germany (renegotiated), the Hong Kong Special Administrative Region (SAR), Kenya, Lesotho (renegoti­ated), Qatar and Sudan, as well as protocols to existing compre­hensive tax treaties with Botswana, Cyprus, Norway and Turkey.

South Africa has signed a protocol to the existing comprehensive tax treaty with Brazil and a comprehensive tax treaty with Zim­babwe (renegotiated). However, these agreements have not yet been ratified.

South Africa is currently negotiating comprehensive tax treaties with Cuba, the Isle of Man (limited treaty), Morocco, Senegal, Syria, the United Arab Emirates and Vietnam, as well as proto­cols to existing comprehensive tax treaties with Austria, Belgium, Germany, Indonesia, Kuwait, Luxembourg, Mozambique, Nether­lands, Swaziland, Switzerland and Thailand, but these instru­ments have not yet been signed.

South Africa is currently renegotiating tax treaties with Malawi, Namibia, Singapore and Zambia, but the renegotiated treaties have not yet been signed.