With the introduction of the new dividends tax on 1 April 2012, the distinction between cash dividends and dividends in specie requires consideration.
Where a company declares and pays a dividend and that dividend consists of a distribution of an asset in specie, the amount of the dividend is deemed to be equal to the market value of the asset on the date that the dividend is deemed to be paid, that is, the earlier of the date on which the dividend is paid or becomes payable by the company declaring the dividend.
In terms of the new rules, in the case of a cash dividend declared by a South African resident company, or a foreign company if the share in respect of which that dividend is paid is a listed share, the declaring company or regulated intermediary is liable to withhold the dividends tax. The liability for the tax is, however, that of the beneficial owner thereof, that is, the person entitled to the benefit of the dividend attaching to the share. Where the dividend is an in specie dividend, the liability for the dividends tax is on the company declaring the dividend.
There are certain exemptions from the dividends tax. The main exemption that may apply in the case of the declaration of a cash dividend is where the beneficial owner of such dividend is a South African resident company. Other exemptions include dividends received by beneficial owners that are Public Benefit Organisations and Pension Funds. Where a company declares and pays a dividend in specie, the dividend would be exempt from the dividends tax to the extent that it constitutes a distribution of an asset in specie if the person to whom the payment is made has, by the date of payment of the dividend, submitted to the declaring company a declaration that the portion of the dividend that constitutes a distribution of an asset in specie would, if that portion had not constituted an asset in specie, have been exempt from the dividends tax. Dividends in specie are also exempt from the dividends tax where the beneficial owner forms part of the same “group of companies”, as defined in section 41 of the Income Tax Act, No 58 of 1962 (“the Act”) as the company declaring the dividend. Finally, dividends in specie are exempt if the dividend constitutes a disposal upon the cessation of South African residence by a company or trust, or upon the liquidation, winding-up or deregistration of a company or trust.
Dividends tax is levied at a rate of 15% of the amount of the dividend paid. In certain instances, a reduced rate of dividends tax may be applicable. In the case of cash dividends declared and paid, and where the declaring company withholds dividends tax, the company must withhold dividends tax at a reduced rate if the person to whom the payment is made has submitted to the company a declaration that the dividend is subject to a reduced rate as a result of the application of an agreement for double taxation (“DTA”). In addition, the recipient of the dividend must submit a written undertaking to forthwith inform the company in writing should the beneficial owner cease to be the beneficial owner. The same rules apply where the regulated intermediary withholds the dividends tax.
A company that declares and pays a dividend that constitutes a distribution of an asset in specie is liable for the dividends tax at a reduced rate in respect of that portion of the dividend that constitutes the distribution of an asset in specie if the person to whom the payment is made has, by the date of payment, submitted a declaration to the company stating that the portion of the dividend in specie would, if that portion had not constituted a distribution of an asset in specie, have been subject to a reduced rate as a result of the application of a DTA. In other words, in the case of dividends in specie, there is no qualification for treaty relief since the liability for dividends tax is on the declaring company, but the analysis should be performed as if the dividend in question was a cash dividend in order to determine whether any treaty relief is available. Where treaty relief is available, the declaring company would withhold dividends tax at the applicable rate.
In the case of foreign dividends in specie, the non-resident beneficial owner may not be able to utilise the dividends tax paid as a credit against the liability arising in its jurisdiction. This would, however, depend on the jurisdiction in question. The South African Revenue Service (“SARS”) indicated that foreign dividends in specie should be subject to normal tax in South Africa. However, in terms of section 9(4) of the Act, foreign dividends are not regarded as being from a South African source. As a result, and on the basis that section 9(4) does not distinguish between cash and non-cash dividends, any foreign dividend should not suffer tax in South Africa. This point may, however, still be open for debate insofar as it relates to non-cash dividends.