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South Africa: South African Budget 2017


Anne Bennett

On February 22, the South African Minister of Finance delivered the 2017 budget, which proposed raising an additional ZAR 28 billion ($2.2 billion) primarily by collecting ZAR 16.5 billion more in personal taxes and ZAR 6.8 billion through an immediate increase in the dividend withholding tax rate from 15% to 20%. Apart from any treaty relief, profits extracted from South African companies will now suffer an effective rate of 42.4% (up from 38.8%) once 28% corporate tax and 20% dividends tax is accounted for.

The top individual tax rate is also increasing from 41% to 45% with a corresponding increase in the capital gains tax (CGT) rates for individuals and trusts from 16.4% and 32.8% to 18% and 36%, respectively. Although no changes were proposed to corporate tax rates, proposals likely to increase tax payable by companies were announced, many of them targeted at perceived tax avoidance strategies.

Dividends are generally exempt from income tax and it is proposed that structures seeking to take advantage of this, such as the use of share buybacks (classified as dividends) rather than share sales which would trigger CGT, will be targeted. Dividend stripping rules already exist to reclassify otherwise exempt "dividends" as taxable, where a company borrows funds from its prospective purchaser in order to declare a dividend to its shareholder (seller) prior to the sale of the shares in the company. These rules are likely to be broadened to apply irrespective of the source of the borrowing used to fund the dividend.

Not surprisingly in this BEPS environment, the theme of tax avoidance was also a key focus in the cross-border context.

New rules may be introduced to limit situations in which distributions from a South African company to non-resident shareholders can be classified as tax exempt repayments of capital rather than as dividends subject to dividends tax. With regard to controlled foreign corporations (CFCs), a fresh attempt will be made to draft legislation targeting structures in which trusts are interposed between South African taxpayers and foreign companies, resulting in those foreign companies escaping the ambit of South Africa's CFC rules.

The Treasury also announced that South Africa will sign the OECD Multilateral Instrument in June 2017 and will adopt the principal purpose test (PPT) because it is the preferred measure to prevent treaty abuse. The Treasury believes the PPT approach is appropriate because the wording of this test aligns with the wording of the "sole or main" purpose test found in South Africa's domestic General Anti Avoidance Rule.

The tax exemption that applies to foreign earnings of South African tax resident employees working abroad for more than 183 days in any 12-month period, including a continuous period exceeding 60 days, is narrowing. Going forward, this exemption will only be available if the employee pays tax on the foreign earnings in another country.

On a more positive note, it was announced that the regulatory framework regarding cross-border intellectual property (IP) transactions will be relaxed in light of unintended challenges that are making South Africa uncompetitive as a jurisdiction in which to develop and own IP. The relaxation will involve amendments to the related income tax provisions and exchange control policies.

More detail in regard to all of the proposals mentioned above will only be available when the first round of related draft legislative amendments is released for comment later this year.

Anne Bennett (

Webber Wentzel

Tel: +27 11 5305886


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