South Africa has a residence-based tax system. Companies are considered to be residents in South Africa if they are incorporated or have their place of effective management in South Africa. In cases of competing residence status, the tie breaker test contained in a relevant double tax treaty (DTT) will be decisive.

Income tax is imposed under the Income Tax Act (ITA). Non-residents who carry on business in South Africa, are employed in South Africa, or sell immovable property (or an interest in such) in South Africa are also subject to South African income tax (the latter through an inclusion of capital gains in taxable income).

In South Africa, 80% of capital gains realized by companies are included in taxable income that is subject to income tax. The inclusion rate for individuals is 40%. Capital gains tax, thus, applies as an inclusion into taxable income, and not as a separate tax.

The ITA generally imposes a 20% tax, known as dividends tax, on the gross value of dividend distributions. The primary blanket exemption from dividends tax is for dividends distributed to a beneficial shareholder that is a South African tax resident company. Dividends tax, thus, applies to non-residents who receive dividends from a South African company.

The ITA imposes a 15% withholding tax on non-residents who receive certain interest payments or royalties from South Africa. The South African payer of any such amount is liable for withholding and remitting this tax on behalf of the non-resident recipient.

South Africa has an extensive DTT network, which often reduces or eliminates the 20% / 15% withholding tax rates on such types of income.

Other relevant taxes in South Africa are value-added tax (VAT), donations tax, estate duty and securities transfer tax (STT).

In this chapter

• Legal system
• Taxation authorities
• Business vehicles
• Financing a corporate subsidiary
• Corporate income tax
• Cross-border payments
• Payroll taxes
• Indirect taxes

Legal system

South Africa operates under a common law legal system.

Taxation authorities

The tax system in South Africa is administered by the South African Revenue Service (SARS).

Business vehicles

A non-resident may either establish a South African business vehicle to carry on business in South Africa or operate directly through a branch of a foreign entity (typically with a South African permanent establishment). Under company law, a branch of a foreign company is regulated as an “external company” – see below. South African business vehicles are companies (private or public) and partnerships (general or limited). While it is also possible to use a trust to carry on business in South Africa, due to a number of complexities, a trust is rarely utilized for these purposes.

Partnerships

A partnership (whether general or limited) is generally treated as fiscally transparent for South African income tax purposes. Although partnerships are required to file annual income returns, it is the partners of the partnership, and not the partnership itself, that are subject to income tax under the ITA. Partnerships are, thus, treated as tax transparent. However, the ability of a limited partner to deduct losses incurred by a limited partnership may be restricted to the extent that the losses exceed the limited partner’s “at-risk amount.”

The tax residence of a partnership is not a decisive factor, but rather the tax residence of the respective partners.

Companies

A company does not require any minimum capital amount for its establishment. However, to issue shares, an amount of capital determined by the directors to be adequate must be received by the company.

The Companies Act, No. 71 of 2008 (Companies Act) does not provide for the incorporation of an unlimited liability company.

Foreign company (with or without a South African branch)

A foreign company that carries on business in South Africa is subject to tax under the ITA in respect of its taxable income that is considered to be from a South African source. Codified source rules apply for certain types of income such as dividends, royalties and interest.

The Companies Act requires a foreign company to register as an “external company” if it conducts business in South Africa. The Companies Act lists (on a non-exhaustive basis) a series of activities which will be regarded as conducting business, such as being a party to one or more employment contracts in South Africa, or being engaged in a course of conduct in South Africa over a period of at least six months as would lead a person to reasonably conclude that the company intended to continually engage in business in South Africa.

The determination of whether a company is carrying on business in South Africa is generally made in accordance with common law principles.

Where the foreign company is resident in a country with which South Africa has a DTT pursuant to which the company may claim treaty protection, the company will generally be exempt from South African taxation on its business profits, except to the extent that the profits were earned through a permanent establishment situated in South Africa.

A company that operates through a South African permanent establishment (such as a branch) will be subject to South African income tax, which is taxed as a branch tax (see details below). Branches of foreign companies are not considered to be separate legal entities for tax purposes, and no tax is withheld on transfers of profits to the head office.

Financing a corporate subsidiary

Exchange Controls

South Africa has an exchange control regime in place that regulates the cross-border flow of funds, including capital flows. In general, shares issued to a non-resident must be fully paid up and the relevant share certificate must be endorsed as “non-resident.” Debt funding is subject to approval and interest rate limits, which are generally up to 3% above the base rate of the relevant currency for arm’s length loans in foreign currencies, and 5% for arm’s length loans in South African Rands. Non-arm’s length loans, such as shareholder loans, are typically limited to the interbank rate that applies to the currency in question. The interest rate on shareholder loans must be no higher than the applicable base rate, which may be exceeded only with the specific approval of the Financial Surveillance Department of the South African Reserve Bank.

Neither proceeds from the sale of shares nor dividends may be repatriable without the above-mentioned endorsement. Capital repayments are allowed provided the original inflow was approved.

Equity financing

Contribution for shares

Where an equity investment is made into a South African company in exchange for shares, the amount of the investment is added to the company’s “stated capital” account. Subject to certain adjustments, a company’s stated capital is generally the same as its paid-up capital for tax purposes. The latter concept is defined as the company’s contributed tax capital (CTC) in the ITA.

CTC is relevant for the characterization, for tax purposes, of distributions made by a South African resident company.

Contributions without taking additional shares

The Companies Act does not provide for equity contributions made by a shareholder to a South African incorporated company without the issuance of additional shares.

Distributions of paid-up capital (or CTC)

A company is permitted to make distributions of its CTC to a non-resident shareholder without incurring any South African withholding tax. However, CTC distributions can only be made proportional to the respective shareholding of its shareholders. Disproportional distributions are designated as dividend distributions and are thus exposed to dividends tax.

A company distribution that is not designated as a return of capital (CTC) is classified as dividends by default and is, thus, exposed to dividends tax, subject to possible DTT relief.

Debt financing

Withholding tax implications

South African companies are permitted to borrow funds from related or third parties without tax implications on the inflow save as set out below. Furthermore, there are no South African tax implications on the repayment of the principal amount of such debt.

Interest payments made by a South African resident company to a non-resident are subject to a withholding tax of 15%. As previously mentioned, the withholding tax rate can be reduced or eliminated under an applicable DTT. For example, the South Africa-United States DTT eliminates withholding tax on cross-border, non-arm’s length interest payments (other than participating interest).

Thin capitalization

If a South African subsidiary is to be financed with debt, it may be subject to the thin capitalization rules contained in the ITA. These rules restrict the deductibility of interest incurred by a resident company.

Such thin capitalization provisions apply as part of the general transfer pricing rules. The primary test for thin capitalization purposes is to assess the commercial terms and conditions of an agreement concluded between independent parties, which is then compared to the terms and conditions concluded between a South African taxpayer and a non-resident connected person.

In addition to thin capitalization rules, provisions in the ITA restrict the deductibility of interest on loans obtained in connection with acquisitions and reorganizations. There are also provisions regulating the deductibility of interest in respect of a debt owed to a person that is not subject to tax in South Africa. These apply where the funds are obtained directly or indirectly from a person that is in a controlling relationship in relation to the debtor.

In addition, the ITA 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%).

On January 17, 2023, SARS published an Interpretation Note titled “Determination of the taxable income of certain persons from international transactions: intra-group loans.” This Interpretation Note provides guidance on how SARS will determine arm’s length pricing for intra-group loans. The Interpretation Note also provides guidance on the consequences for a taxpayer if the amount of debt, the cost of debt or both are not arm’s length.

Securities transfer tax

South Africa does not impose an STT in respect of debt or equity financing but only on the transfer of securities. The rate of STT is 0.25% of the value of the securities transferred.

Corporate income tax

Income tax rate

For tax years ending before March 31, 2023, the corporate tax rate applicable to the corporate income of both resident and non-resident companies is a flat rate of 28%. This rate is reduced to 27% effective for tax years ending on or after March 31, 2023.

Capital gains

A South African resident company, including a South African subsidiary of a foreign company must include 80% of all capital gains (referred to as taxable capital gains) in its taxable income. Such capital gain inclusions are then taxed in the same manner as ordinary income. Capital losses can be used to offset taxable capital gains in the year. To the extent that allowable capital losses exceed taxable capital gains in a year, the excess may generally be carried forward indefinitely to be applied against taxable capital gains in future years.

A non-resident is only taxed on gains arising from the disposal of immovable property or an interest therein. Included in this would be the disposal of shares in a so-called “property rich company.” This means that an interest in fixed property includes a direct or indirect interest (shareholding) of at least 20% in a resident or non-resident 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 proceeds of the disposal of an asset exceeds the base cost of the asset. A capital loss arises if the base cost exceeds the proceeds of the disposal. Capital losses may offset capital gains, and regular income losses may offset net capital gains. However, net capital losses may not offset regular income.

This inclusion rate for companies therefore has the result that its capital gains are subject to capital gains tax at a rate of 21.6%.

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% (reduced to 27% with effect for tax years ending on or after March 31, 2023).

Petroleum and gas production is taxed in accordance with the usual provisions of the ITA, 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% (reduced to 27% with effect for tax years ending on or after March 31, 2023) for both South African-resident and non-resident 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 staggered reduced rates on their taxable income.

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

Branch tax

The ITA imposes a tax at 28% (reduced to 27% for tax years ending on or after March 31, 2023) of South African sourced after-tax profits earned by a branch of a non-resident company. Branches are not liable for dividends tax or any branch profits repatriation tax. The corporate income tax rate for branches is also reduced to 27% for tax years ending on or after March 31, 2023.

Computation of taxable income

Taxable base

The assessment of tax is based on taxable income determined in accordance with the ITA. Taxable income normally approximates profit calculated in accordance with International Financial Reporting Standards, before adjustment for specific allowances and non-deductible items.

Deductions

A taxpayer is generally permitted to deduct its current expenses in computing taxable income. 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.

As a general rule, capital expenses are not deductible – except as base cost for capital gains tax purposes. However, the ITA provides for various capital cost allowances, based on the nature of the asset. Allowances claimed reduce the base cost of relevant capital assets in accordance with the depreciated tax values. Any later disposal of the asset in excess of its tax value will result in a recoupment subject to income tax to the extent that a depreciation allowance was claimed.

Income tax reporting

South African resident companies and non-resident companies that carry on business in South Africa or that dispose of taxable South African property are required to file an annual corporate income tax return.

Cross-border payments

Transfer pricing

Transfer pricing documentation is mandatory for all South African taxpayers with “potentially affected transactions” (that is, transfer pricing transactions). Additional transfer pricing record-keeping requirements apply if certain thresholds are met.

If the aggregate of potentially affected transactions for the year exceeds ZAR 100 million, the South African taxpayer is required to keep certain general records. For each category of transaction (e.g., management fees, sales) with potentially affected transactions exceeding ZAR 5 million, significant additional records must be kept to support the pricing of the transactions.

Significant additional information is also required where “a party to a transaction is based outside of South Africa, and where the transaction involves financial assistance”.

If the above-mentioned thresholds are not met, a South African taxpayer with transfer pricing transactions is still required to keep sufficient records to support the arm’s length nature of the transactions.

An ultimate parent entity company that is tax resident in South Africa and which is part of a multinational enterprise (MNE) group with a consolidated turnover of at least ZAR 10 billion in the prior tax year is required to comply with the South African country-by-country reporting regulations. A threshold of €750 million applies to MNEs headquartered outside South Africa.

Withholding tax on passive income

The ITA imposes a 20% tax, known as dividends tax on dividends received by a resident or non-resident shareholder. It furthermore imposes a 15% withholding tax on non-residents who receive certain interest payments or royalties from South Africa. The South African payer of any such amounts is liable for withholding and remitting this tax on behalf of the non-resident recipient.

Multilateral Instrument

South Africa is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). It has agreed to adopt the minimum standards (principal purpose test and dispute resolution) as well as certain optional provisions. In this regard and pursuant to Article 6(6) of the Convention, South Africa chose to apply Article 6(3).

South Africa deposited its Instrument of Ratification of the MLI with the OECD Depository on September 30, 2022. The MLI entered into force in South Africa on January 1, 2023.

SARS published a table that records the agreements listed by South Africa under its MLI Position that may be modified by the MLI. The synthesized texts for each Covered Tax Agreement are drafted in consultation with the relevant treaty partners but are non-binding.

South Africa listed 76 tax treaties under its MLI Position. SARS stated on January 17, 2023 that 50 of the 76 jurisdictions listed by South Africa have ratified the MLI. Accordingly, these tax treaties will meet the treaty related BEPS measures without the need for renegotiation.

The list can be accessed here.

One key modification that will affect most of South Africa’s DTTs covered by the MLI is the so-called “principal purpose test” (PPT). The PPT provides that a benefit under a tax treaty will not be granted if it is reasonable to conclude that obtaining the benefit was one of the principal purposes of the arrangement or transaction that resulted directly or indirectly in that benefit, unless the granting of the benefit was in accordance with the object and purpose of the treaty.

International tax reform

Although not a member of the OECD, South Africa has observer status and has adopted most of the recommendations set out in the OECD 15 Base Erosion and Profit Shifting (BEPS) Action Plan (BEPS 1.0 or Pillar One). Then, more recently, South Africa also became a member of the OECD’s Inclusive Framework on BEPS, including a commitment to support the BEPS 2.0 (or Pillar Two) initiative.

In the 2022 Budget Speech it was announced that local legislative amendments to implement Pillar One and Pillar Two in South Africa will be proposed once the implementation framework for the Two-Pillar Solution has been finalized by the OECD/G20, and has been translated into a local context.

Given the extent of jurisdictions involved and the aim to reach consensus-based solutions, there have been delays in the publication of the various framework documents by the OECD/G20 and it is unclear whether the intended 2023 deadline for the publication of the complete implementation framework will be met.

In any event, the Minister of Finance has made it apparent that the National Treasury will be unable to make the necessary local legislative proposals until such time as the implementation framework has been completed by the OECD/G20.

The draft Global Minimum Tax Bill was released on February 21, 2024. As expected, South Africa has adopted the general approach in relation to Pillar Two on the basis that the Under Taxed Profits Rule is not immediately implemented and for South Africa to be able to collect the tax instead of the foreign low taxed jurisdiction. The thrust is, thus, for the taxes to be paid in South Africa as opposed to in the low taxed jurisdiction. On this basis, it is estimated that more taxes will be collected at a South African level.

The Draft Global Minimum Tax Bill is aimed at implementing the GloBE Model Rules in South Africa to enable South Africa to impose a multinational top-up tax at a rate of 15% on the profits of in-scope multinational enterprise groups. The Draft Global Minimum Tax Administration Bill is aimed at the administration of the Draft Global Minimum Tax Bill.

After receipt of written comments, the National Treasury and SARS will engage with stakeholders through public workshops to discuss the written comments on the draft bills. The Standing Committee on Finance and the Select Committee on Finance in Parliament are expected to make a similar call later in 2024 for public comment and convene public hearings on the draft bills before their formal introduction in Parliament. Thereafter, a response document on the comments received will be presented at the parliamentary committee meetings, after which the draft bills will then be revised, taking into account public comments and recommendations made during committee hearings, before they are tabled formally in Parliament for consideration in the 2024 / 2025 legislation cycle.

Payroll taxes

Employees tax

Employers paying remuneration to employees are liable to withhold employees’ tax at set rates. These withholdings are effectively an advance payment of the income tax liability of the employee concerned. The amount withheld is balanced against the income return of the employee concerned, and may result in a refund or additional tax, depending on the difference.

Indirect taxes

Value-added tax (VAT)

VAT is imposed on a wide range of goods and services, at the standard rate of 15%. Certain goods and services are zero rated. The system operates as a self-assessment down the supply chain, and registered vendors are allowed to offset their output VAT against input VAT. Certain supplies, such as financial services, are deemed exempt, which may impact the ability to claim input VAT credits for those engaged in this sector.

Foreign entities that carry on an enterprise, or part of an enterprise, in South Africa are required to register as vendors for VAT purposes and charge VAT on their supplies.

VAT also applies to so-called “electronic services” supplied by foreign enterprises to South African residents. This will require that the offshore supplier register as a vendor for VAT purposes. Whether a service constitutes an electronic service can be a highly technical issue.

The final domestic consumer thus bears the final liability. Specific rules with respect to the place of supply exist to determine whether a supply is deemed to be made in South Africa.

Transfer duty

A transfer duty is payable on any acquisition of immovable property.