Mr A is tax resident in the United Kingdom (UK). He owns some shares in X Pty Ltd, a private company incorporated and tax resident in South Africa (SA). On 15 April 2012, X Pty Ltd declares and pays a dividend in specie to its shareholders, including Mr A.
What are the dividends tax implications?
In terms of s64EA of the Income Tax Act, No 58 of 1962 (Act) the person liable for the dividends tax in respect of an “ordinary” dividend (that is, a dividend that does not constitute a distribution of an asset in specie) is the beneficial owner of the relevant share (that is, the person entitled to the benefit of the dividend attaching to a share, usually the registered shareholder). However, in terms of that provision, the person liable for the dividends tax in respect of a dividend which consists of a distribution of an asset in specie is the company that declares and pays the dividend.
In the Explanatory Memorandum on the Taxation Laws Amendment Bill, 2001 – the Bill that introduced many changes to the dividends tax regime – the National Treasury says (at page 38) that “[t]reaty relief is also available for in specie dividends…”
That statement is perhaps a bit of an over-simplification.
As noted above, the dividends tax in the case of a dividend in specie is a tax on the company, and not a tax on the beneficial owner. So, as a non-resident shareholder is not liable for the dividends tax in that case, no double tax can arise and one is not able to apply a double taxation treaty. In this respect, the dividends tax in relation to dividends in specie is akin to secondary tax on companies, which is also a tax on the company and for which no treaty relief is available.
Section 64FA(2) of the Act says that a company that declares and pays a dividend that consists of a distribution of an asset in specie is liable for the dividends tax at a reduced rate if the person to whom the payment is made submits a declaration in the prescribed form to the company “that the portion of the dividend that constitutes a distribution of an asset in specie would, if that portion had not constituted a distribution of an asset in specie, have been subject to that reduced rate as a result of the application of an agreement for the avoidance of double taxation…”
Effectively, s64FA(2) says that, for purposes of dividends tax, a dividend in specie declared and paid to a shareholder who is not tax resident in SA must be treated as if it were an ordinary dividend which could be reduced by an appropriate treaty.
To return to the example above: X Pty Ltd is liable for the dividends tax in respect of the dividend in specie paid to its shareholders. As Mr A is not liable for the tax, he is not able simply by virtue of the UK-SA double taxation treaty to require a reduction of the rate of dividends tax. However, Mr A will be able to fill in the prescribed declaration and require X Pty Ltd to reduce the rate to 10 per cent by virtue of the s64FA(2) read with Article 10 of the SA-UK double taxation treaty.
To sum up, in the case of a dividend in specie paid to a non-resident shareholder, the shareholder may be able to reduce the rate of dividends tax not simply by virtue of a double taxation agreement, but rather by virtue of SA domestic law read with a relevant double taxation agreement. A subtle, but perhaps important distinction.