There are various types of withholding taxes in South Africa. Dividend Withholding Tax and Withholding Tax on Interest currently has an impact on our investors and whilst the proposed Withholding Tax on Services may not have an impact on our investors it is important to understand potential impacts upon your business.
The old: Dividend Withholding Tax
On the 1 April 2012 the National Treasury replaced Secondary Tax on Companies with Dividend Withholding Tax (DWT). DWT is imposed on shareholders at a rate of 15% on dividends declared by a company. The company that declares and pays a dividend or a regulated intermediary that pays a dividend declared by any other person has the withholding obligation. In the unit trust industry we as the regulated intermediary are responsible to withhold any tax on dividends and pay over to SARS on behalf of our investors.
Natural persons resident in South Africa, certain trusts and any foreign entity or foreign individuals are liable for DWT. Foreign individuals may however qualify for a reduced tax rate for DWT depending on whether or not there is a double taxation agreement between South Africa and their country of residence. Local South African companies are exempt from DWT. For a list of all other investors exempted from DWT as well as how to apply for an exemption or reduced rate for DWT, please see our Legal Update article ‘Dividend Withholding Tax’¹.
Other forms of withholding taxes were introduced in the past however withholding taxes on disposal of immovable property by a non-resident, foreign entertainers and sportspersons, and royalties are not taxes that our investors are responsible for as unit holders, and we will therefore not discuss them any further for the purpose of this article.
The new: Withholding Tax on Interest
Withholding Tax on Interest (WTI) is charged at a rate of 15% on interest paid on or after 1 March 2015 by any person to or for the benefit of a foreigner from a source within South Africa. While the foreign person is responsible for the tax, it must be withheld by the person making the interest payment to or for the benefit of the foreign person. Foreign persons encompass natural persons as well as legal entities.
Exemptions and reduced rates are applicable, based on three categories:
1. The payor: an amount of interest is exempt if it is paid by;
- the government (national, provincial or local sphere) of South Africa;
- any bank, including the South African Reserve Bank (SARB), Development Bank of South Africa or
- Industrial Development Corporation; or
- a headquarter company relating to financial assistance where the headquarter company directly or
- indirectly holds 10% of the equity and voting rights.
2. The instrument: an amount of interest is exempt if it is paid;
- in connection with listed debt, e.g. bonds listed on the Johannesburg Stock Exchange (JSE);
- to any foreigner that is a client, to whom a regulated person provides securities services, acts as an agent for another person about those services in which case it will include the agent or exclude the other person, if the contractual arrangement between the parties shows this to be the intention.
The two exemptions above apply to the payor (for example the unit trust fund) and not the investor in that the payor will automatically apply the exemption if it meets any of the criteria mentioned above. A foreign investor need not apply for any exemption based on the above.
3. The foreign recipient: a foreign person is exempt from WTI if:
- they are a natural person who was in South Africa for a period more than 183 days in total during the 12 months before the date when the interest is paid; or
- the debt claim for which interest is paid is effectively connected with a permanent establishment of the foreign person who is registered as a taxpayer in South Africa.
In order to qualify for an exemption for WTI in point 3, the foreign recipient must complete a Withholding Tax on Interest Declaration (WTID) which is available from SARS.
A foreign recipient may also qualify for a reduced rate in terms of any applicable agreement to avoid double taxation. In order to receive a reduced rate the foreign recipient needs to complete the relevant section of the abovementioned WTID.
The imminent: Withholding Taxes on Service Fees
The National Treasury intends to introduce a withholding tax, at a rate of 15%, on the amount of any service fee that is paid by any person, to or for the benefit of any foreign person, which has received by or accrued to that foreign person from a source within the South Africa.
The proposed effective date is 1 January 2016 but there remains some debate around whether or not the proposal will go live as early as 1 January 2016, if at all. Once again we anticipate that certain exemptions as well as reduced rates may apply. While the introduction of such tax will have a minimum impact on unit trust investors, it may impact businesses that currently pay service fees to foreign persons.
As unit trust investors it is important to understand the impact of various taxes on your investments and where you as the investor are responsible for reducing your tax exposure. It is important to complete the exemption/reduced rates declarations as any tax unnecessarily paid may have a significant impact on your savings. Remember that ultimately you are responsible for tax owed to SARS and therefore you should be aware of any advantages that SARS may afford you.