Basis of taxation
- South African residents are taxed on their worldwide income.
- Non-South African residents are taxed on their South African sourced income.
- A company will be a South African resident if it is incorporated in South Africa or if it has its place of effective management in South Africa.
- An individual will be a South African resident if he or she is ordinarily resident here or is physically present here for a specified number of days over a five year period.
- Any person who is deemed to be a resident of another state through the application of a double tax agreement will not be treated as a South African resident.
Agreements to avoid double tax
- South Africa has entered into double tax agreements with most of its trading partners.
- In terms of these arrangements a foreign resident will be taxable in South Africa only if it conducts business through a permanent establishment in South Africa (note there are a few exceptions such as withholding taxes).
- South African companies are currently taxed at a rate of 28%.
- Dividends Withholding Tax (WHT) is levied on dividends declared at a rate of 15%.
- The dividend tax of 15% will generally be withheld by the company paying the dividend or a paying intermediary, and the net dividend will be paid to the shareholder.
- South African branches of foreign companies are taxed at a rate of 28%. No dividend withholding tax is imposed on the remittance of branch profits.
- Capital gains earned by companies are effectively taxed at 18.6%.
- Non-residents of South Africa may pay capital gains tax (CGT) on the disposal of:
- Immovable property or any interest or right to or in immovable property and
- any asset of a permanent establishment through which the non-resident is carrying on a trade in South Africa.
- Individuals are taxed on a sliding scale with the highest marginal rate being 40%.
- Capital gains earned by individuals are taxed at an effective rate of 13.3%. There are certain exemptions.
Key income tax issues
- Interest paid to foreign lenders is not taxable unless they have a permanent establishment in South Africa. From 1 January 2015 interest may be taxable in South Africa, at the withholding tax rate of 15%. This withholding tax is a fi nal tax.
- Certain DTA’s will reduce the rate, with some DTA’s reducing the rate to 0%
- There is a withholding tax on royalties paid offshore of 12% (may be reduced through the applicable double tax agreement); on 1 January 2015 this will be increased to 15%.
- Withholding tax on service fees will be introduced from 1 January 2016, at the rate of 15%. This applies to non-residents providing services within South African. The withholding tax on services may also be reduced per various Double Taxation Agreements, and in certain cases the rate is 0%.
- Transfer pricing rules apply and are enforced.
- Three provisional tax payments are made each year.
- The Commissioner for the South African Revenue Service may adjust the consideration in respect of any international transaction between connected parties to reflect on arm’s length price.
- This is to ensure that there is a fair return on the activities conducted, the products contributed and the risks assumed in South Africa.
- If prices between connected parties from different jurisdictions do not reflect an arm’s length price, the South African taxpayer’s taxable income could be increased.
- Transfer pricing adjustments will result in additional tax, interest and penalties.
- Although a Transfer Pricing Policy document is not required by law, it is advisable to prepare and maintain such policy documents to defend prices if they are ever challenged.
- The general arm’s length provisions will be used to determine whether a company is thinly capitalised.
- Businesses must register as an employer with the South African Revenue Service (SARS) and Pay As You Earn (PAYE) must be withheld on a monthly basis from remuneration paid to employees. Social security taxes are also collected through the PAYE system.
- Value-Added Tax (VAT) is levied at a rate of 14% on taxable supplies made by vendors.
- An importer/exporter has to register with SARS to obtain a customs code number. Customs duties are payable on various goods imported into South Africa. Importers need to ensure that they are using the correct tariff classification of the imported goods and apply for import permits where required on certain goods.
- Securities Transfer Tax of 0.25% is levied on the transfer of shares but is not levied on the new issue of shares.
- There is no exchange control over non-residents.
- South African subsidiaries or branches of foreign companies are, however, treated as a resident and thus subject to the controls.
- Investment may be in the form of share capital only or share and loan capital.
- Where a portion of the investment is in loan capital, exchange control approval is required, but this is usually a formality.
- These can be restricted – the maximum is determined in terms of a formula and is linked to the amount of owners’ funds (share capital, loans and accumulated profits). The restriction commences with a foreign holding of 75% or more. The borrowing restrictions have been removed for most companies but are applicable with regard to transactions involving immovable property and certain ‘financial’ transactions, including the purchase of shares.
- The limits may be temporarily increased in certain circumstances.
Dividends or branch profits
- Freely remittable provided the remittances will not cause the subsidiary or branch to become over borrowed locally.
- Interest on a loan from the holding company is remittable provided that the rate of interest is reasonable in relation to the currency of the loan and the loan was previously authorised.
- The interest rate will be reduced where the foreign shareholder lends the funds.
- South African sourced interest is generally exempt from tax when received by nonresidents.
- A withholding tax, at the rate of 15%, on interest paid to non-residents must be made in respect of all payments that became due and payable after 1 January 2015. The rate may be reduced by an applicable Double Tax Agreement.
- License agreements must be approved by the Department of Trade & Industry.
- Acceptable rates vary from 2% to 4% for manufacture of consumer goods and up to 6% for capital goods. Minimum and/or upfront payments (even if recoupable) are not allowed, unless there is immediate benefit, for example, training.
- The payment is subject to a withholding tax of 12% (unless the rate is reduced or eliminated in terms of a double tax agreement).
Management and technical fees
- These may be paid to the holding company/head office if reasonable.
- Usually no withholding tax is withheld in respect of management fees.
- Exchange control approval is not required, provided the fee is supported by a proper invoice. A fee that is calculated as a percentage of turnover will not be allowed.
- Foreign currency is made freely available for import of goods. There is a limited array of goods for which an import permit is required, but the vast majority of products may be imported without a permit. Payment is usually only permitted against proof of import, i.e. by presenting customs-stamped documentation (though it is possible to pay in advance of shipments).
- Foreign currency is also made freely available to pay for foreign services (other than as stated above).
Forward foreign exchange cover
- Obtainable for foreign liabilities and assets.
Immigrants and expatriates
- Concessions are made to new immigrants and expatriates.
- Expatriates may freely remit their savings abroad, after paying tax on their earnings.
South Africa offers various attractive investment incentives, targeted at specific sectors or types of business activities. For more information visit The Department of Trade & Industry at www.thedti.gov.za
- Automotive Investment Scheme (AIS) – AIS has been designed to grow and develop the automotive sector through investment in new and/or replacement models and components that will increase plant production volumes, sustain employment and/or strengthen the automotive value chain.
- Business Process Outsourcing and Off-Shoring Investment Incentive (BPO&O) – The BPO&O investment incentive comprises an investment grant and a training support grant towards costs of company-specific training.
- Capital Projects Feasibility Programme (CPFP) – The CPFP is a cost-sharing grant that contributes to the cost of feasibility studies likely to lead to projects that will increase local exports and stimulate the market for South African capital goods and services.
- Clothing and Textile Competitiveness Programme (CTCP) – This programme provides a cost-sharing grant incentive to both local- and foreign-owned entities.
- Co-operative Incentive Scheme (CIS) – The CIS is a matching cash grant for registered primary co-operatives.
- Critical Infrastructure Programme (CIP) –The CIP is a cost sharing cash grant for projects designed to improve critical infrastructure in South Africa.
- Enterprise Investment Programme (EIP) – The EIP was launched by the government in July 2008, to provide sector-specific financing in order to encourage growth in manufacturing, tourism and related sectors. The EIP is applicable for a period of 6 years until 2014.
- Export Marketing and Investment Assistance (EMIA) – The Department of Trade & Industry offers SA exporter’s incentives and financial assistance with primary export market research, outward selling missions, inward buying missions, showcasing products and services at international exhibitions.
- Film Incentive – A rebate scheme is available to foreign and local fi lm and television production companies.
- Foreign Investment Grant (FIG) – The FIG compensates qualifying foreign investors for costs incurred in moving qualifying new machinery and equipment from abroad to South Africa.
- Industrial Development Zones (IDZ) – These purpose-built industrial estates are linked to international ports that leverage fixed direct investments in value-added and export-orientated manufacturing industries.
- Manufacturing Competitiveness Enhancement Programme (MCEP) – Is one of the key action programmes of the Industrial Policy Action Plan (IPAP) 2012/13 – 2014/15. The MCEP will provide support to companies upgrading their production facilities, processes, products and people in the short to medium term.
- Manufacturing Investment Programme (MIP) – The MIP is a reimbursable cash grant for local- and foreign-owned manufactures who wish to establish a new production facility; expand an existing production facility; or upgrade an existing facility in the clothing and textiles sector.
- National Exporter Development Programme (NEDP) – The purpose of the NEDP is to increase exports, particularly of those products and services that add value and contribute to employment and the green economy.
- Production Incentive (PI) – Under the PI applicants can use the full benefit as either an upgrade grant facility or an interest subsidy facility, or a combination of both.
- Research and Development Tax Incentive Programme (R&D) – This incentive consists of a deduction of 150%, in respect of eligible expenditure on suitable scientific or technological R&D and an accelerated depreciation of assets.
- Section 12i Tax Allowance Incentive (12i TAI) – This incentive has been designed to support greenfield and brownfield investments, therefore focusing on investment in manufacturing assets and training of personnel.
- Support Programme for Industrial Innovation (SPII) – SPII is designed to promote technology development in South Africa through the provision of financial assistance for the development of innovative products and/or processes.
- Tourism Support Programme (TSP) – The TSP is a reimbursable cash grant that aims to support the development of tourism enterprise that will stimulate job creation and increase the geographic spread of tourism investment, outside of the traditional tourism destinations of Durban, Cape Town and Johannesburg.