South Africa: Proposed international tax amendments

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

South Africa: Proposed international tax amendments

Sponsored by

sponsored-firms-ww.png
AdobeStock_258702014_trust

Proposed changes to the Income Tax Act, contained in the 2018 draft Taxation Laws Amendment Bill (DTLAB), were released for comment on July 16 2018. This update focuses on certain international tax-related proposals.

Foreign trusts with South Africa-resident beneficiaries



The South African Revenue Service (SARS) has previously unsuccessfully attempted to broaden the controlled foreign corporation (CFC) rules to target structures involving South Africa (SA)-resident beneficiaries of foreign discretionary trusts that hold a majority stake in one or more foreign companies. There are no such proposed changes to the CFC rules in the DTLAB, but it does include amendments aimed at ensuring that certain foreign dividends and foreign capital gains derived by such trusts will not qualify for any type of tax exemption when distributed to SA resident beneficiaries.

Treaty relief and secondary adjustments

Since January 1 2015, a secondary adjustment under South African transfer pricing rules has been deemed to be a dividend in specie distributed by the South African taxpayer. Dividends in South Africa are subject to 20% dividends tax unless treaty relief applies. Despite this characterisation, SARS has been adamant that secondary adjustments are penalty provisions and do not qualify for treaty relief. Although many of South Africa's tax treaties do not explicitly include secondary adjustments in the definition of 'dividend' in the dividend article, some do. Article 10(3) of the treaty between South Africa and Ireland, for example, includes in the dividend definition "any income or distribution assimilated to income from shares by the laws of the contracting state of which the company paying the income or making the distribution is a tax resident".

To prevent taxpayers from arguing that this type of wording clearly entitles them to treaty relief, SARS is proposing that the definition of dividend in the Income Tax Act (which refers to amounts transferred by a South African company in respect of shares in that company) be changed so as to explicitly exclude secondary adjustments. A secondary adjustment will still be deemed to be a dividend, but only for dividends tax purposes. It can no longer (in SARS's view) be argued to be "a distribution assimilated to income from shares" for treaty purposes. In addition, SARS is seeking to ensure that the administrative requirements for claiming treaty relief are framed in a way that will make it impossible for taxpayers suffering secondary adjustments to comply with them.

These proposals are likely to result in criticism not just from the South African companies affected but also from some of South Africa's tax treaty partners which could justifiably argue that these amendments are deliberate attempts to negate treaty provisions negotiated in good faith.

Broadening of CFC 'high tax' exemption

No income will be imputed from a CFC if that CFC is subject to an aggregate amount of foreign tax which is at least 75% of the amount that would have been payable had the CFC been tax resident in South Africa. The 2018 budget referred to the possibility of dropping the 75% to a lower percentage, given that South Africa's company tax rate of 28% is now high by global standards. Disappointingly, no change has been made in this context in the recent proposed amendments.

more across site & shared bottom lb ros

More from across our site

Luxembourg’s reform agenda continues at pace in 2025, with targeted measures for start-ups and alternative investment funds
Veteran Elizabeth Arrendale will lead the new advisory practice, which will support clients with M&A tax structuring, post-deal integration, and more
MAP cases keep increasing, and cases closed aren’t keeping pace with the number started, the OECD’s Sriram Govind also told an ITR summit
Nobody likes paperwork or paying money, but the assertion that legal accreditation doesn’t offer value to firms and clients alike is false
Ryan hopes the buyout will help it expand into Asia and the Middle East; in other news, three German finance ministers have called for a suspension of pillar two
SKAT, which was represented by Pinsent Masons, had accused Sanjay Shah and other defendants of fraudulent dividend tax refund claims
TP managers must be able to explain technical issues in simple terms, ITR’s European Transfer Pricing Forum heard
Prudential had challenged HMRC over VAT group relief; in other news, Donald Trump unveiled timber and wood tariffs, and the European Commission published a ViDA implementation strategy
Australia’s CbCR rules have ‘widespread support’ and do not put American companies at a competitive disadvantage, the FACT Coalition said
Baker McKenzie advised two of the member firms involved, while several advisers provided transaction counsel to US-based Grant Thornton Advisors
Gift this article