This content is from: South Africa

South Africa: Proposed income tax amendments and tax treaty developments

The draft Taxation Laws Amendment Bill (DTLAB), released for comment on July 19 2017, contains a proposal to include a new section in the Income Tax Act to address structures that, in the view of the South African Revenue Service (SARS), are aimed at avoiding dividends tax on distributions made to foreign shareholders by local companies.


Distributions made out of 'contributed tax capital' (CTC), a notional concept that exists only for tax purposes, do not attract South Africa dividends tax. CTC is determined separately in relation to each class of share and equals the consideration received for the issue of such shares, reduced by CTC repayments made by the company on or after January 1 2011.

Any distribution made will automatically qualify for tax purposes as a dividend, subject to dividends tax (irrespective of the accounting treatment), unless the company's directors elect to treat it as a repayment of CTC, in which case the distribution will qualify as a tax-free 'return of capital'.

The proposed amendment targets two structures that result in the creation of CTC and hence increase a company's ability to make tax-free distributions. The first involves a non-resident entity disposing of its shares in a local subsidiary (SA SubCo) to a newly interposed South African company (SA HoldCo) in exchange for the issue of new shares. The second structure involves a non-resident subscribing in cash for shares in a resident company (SA HoldCo) whereafter SA HoldCo applies the subscription proceeds to purchase shares in another company that is part of the same group of companies as the non-resident subscriber and SA Holdco. The percentage threshold for a group of companies in this provision is reduced to 50% as opposed to the normal 70% threshold.

In both these scenarios, it is proposed to limit the new CTC created in SA Holdco to an amount equal to the CTC attaching to the shares acquired by SA Holdco in the relevant transaction.

This section is proposed to come into operation on July 19 2017 and, if enacted, will apply to any shares issued on or after that date.

Most favoured nation

In a previous update, we discussed the binding ruling given by SARS, confirming that a zero rate of dividends tax applies to dividends distributed by South African companies to qualifying Swedish tax resident shareholders because of the most favoured nation provision (MFN) in the South Africa-Sweden treaty.

The Dutch High Court has recently handed down a judgment confirming that in its view, no dividends tax applies between residents of South Africa and residents of the Netherlands because of the MFN provision in the South Africa-Netherlands treaty read together with the MFN provision in the South Africa-Sweden treaty. Since South Africa has provided a zero rate of dividends tax to Swedish residents under a treaty concluded after the South Africa-Netherlands treaty, the MFN provision in the latter treaty requires the same zero rate to apply to distributions between South Africa and the Netherlands. This is good news for those local taxpayers currently seeking refunds from SARS of dividends tax previously withheld on distributions to Dutch shareholders, based on the legal arguments that have now been conclusively upheld in the Netherlands. It will be interesting to see what impact the Dutch case has on SARS, which has been contesting the refund claims.

Anne Bennett (
Webber Wentzel
Tel: +27 11 5305886

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