South African tax for investors
South Africa has a well-developed and regulated taxation regime. While the laws are constantly being revised and amended to keep them up to date and in line with international best practice, here are the tax basics for foreigners investing or working in South Africa.
The tax regime is set by the National Treasury and managed by the South African Revenue Service (Sars).
Key starting points
- Individuals who are South African residents are taxed on their worldwide income.
- Non-South African residents are only taxed on income from a source in South Africa.
- There is no group taxation in South Africa – so each company is taxed as a separate taxpayer.
- Partnerships are not recognised as separate entities for income tax purposes and are fiscally transparent. Instead, the individual partners are taxed separately on their share of the partnership profits.
- A company is regarded as a South African resident if it is incorporated in South Africa or if it has its place of effective management in South Africa.
- Businesses may select their own financial year-end. For individuals, the tax year runs from 1 March to 28 February.
- Businesses must file annual income tax returns with Sars. It is also a legal requirement for all companies and close corporations to file annual returns with Companies and Intellectual Property Commission annual basis. See www.cipc.co.za for more.
- Special dispensations are provided for companies who derive their income from mining, gold mining, oil and gas, and farming. See www.sars.gov.za for details.
The principal source of direct taxation revenue in South Africa is income tax. Individuals are taxed on a progressive basis up to a maximum rate of 40% on taxable income exceeding R671 000 a year (tax year end February 2013).
Tax on the income of non-South African residents is source-based, meaning that any income from a source within (or deemed to be within) South Africa is taxed, irrespective of the residence of the recipient of the income.
Domestic companies are taxed at a flat rate of 28%.
A 15% withholding tax is imposed on dividends paid to resident or non-resident shareholders.
Trusts (other than special trusts) are taxed at a flat rate of 40% on income and 66.6% of capital gains that do not vest in a beneficiary of the trust during the tax year in question.
Special trusts, such as those created solely for the benefit of a person who is mentally ill or disabled, are taxed on the same progressive basis as individuals.
Value Added Tax (VAT)
The principal source of indirect taxation revenue in South Africa is Value Added Tax (VAT). If a subsidiary or branch of a foreign-owned company sells goods or provides services, it must register as a vendor with Sars and charge and pay over VAT.
The standard rate of VAT is 14%. Exports, certain foodstuffs and other supplies are zero-rated, and certain supplies are exempt (mainly certain financial services, residential accommodation and public transport).
Capital gains tax
Capital gains tax is levied on non-residents to the extent that they dispose of immovable property situated in South Africa, or have a permanent establishment in South Africa and dispose of an asset of that establishment.
Double taxation agreements
The tax liability of a foreign company depends on the nature of the income derived by it, as well as the existence of a double taxation agreement.
South Africa has agreements with most of its trading partners to prevent double taxation of income accruing to South Africa taxpayers from foreign sources, or of income accruing to foreign taxpayers from South African sources.
In terms of these arrangements a foreign resident will be taxed in South Africa only if it conducts business through a permanent establishment in South Africa.
Note: 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.
Foreign tax credits
The Income Tax Act grants rebates in respect of foreign taxes on income. A South African resident is entitled to a rebate equal to the sum of any taxes on income payable to the government of another country, in respect of, inter alia, income received by such individual from a source outside South Africa which has been included in that individual’s taxable income in South Africa. The foreign tax credit is limited to the attributable South African income tax on the foreign income.
Headquarter company regime
The headquarter company regime (HQC) is another push for South Africa to enhance its role as gateway to the continent. This aims to reduce the tax cost of operating a headquarter company in South Africa. For example, it exempts companies from withholding dividends tax and tax on interest and royalties on income flowing through them from foreign subsidiaries.
Other taxes affecting subsidiaries or branches of foreign-owned companies:
- If a firm employs personnel, it must register as an employer with Sars and deduct tax (PAYE) from its employees' salaries.
- A skills development levy at the rate of 1% of remuneration is payable.
- Transfer duty is payable on land and buildings (8% of the value of the property in the case of a corporate purchaser).
- Stamp duty at 0.25% is payable on transfer and issue of shares. Stamp duty is also payable on certain other agreements, such as leases and mortgage bonds.
- Securities transfer tax is due on the change in beneficial ownership of securities, such as shares in a company or members' interests in a close corporation.
- Customs and excise taxes.
- Compulsory workmen's compensation, assurance and unemployment insurance fund premiums are payable, although these are relatively insignificant. There are no other social security payments.
- Estate duty (20%) is paid on all assets of a deceased person's estate if they are South African residents. For non-residents, only the assets within South Africa form part of the total value of the estate.
- Donations tax (20%), paid by the donor, is levied on the value of property donated by South African individuals and companies. Certain donations are exempt and non-residents are not liable for donations tax.
Reviewed: 25 March 2013
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