Dividends Tax

The legislative foundation for the new Dividends Tax is to be found in sections 64D to 64N of the Income Tax Act, 1962 (the Act) and became effective on 1 April 2012.

Dividends Tax is a tax on shareholders (beneficial owners) when dividends are paid to them, and, under normal circumstances, are withheld from their dividend payment by a withholding agent (either the company paying the dividend or, where a regulated intermediary is involved, by the latter).

A dividend is any payment by a company to a shareholder in respect of a share held in that company, excluding the return of contributed tax capital (i.e. consideration received by a company for the issue of shares). It is triggered by the payment of a dividend by any:

  1. South African tax resident company; or
  2. Foreign Company whose shares are listed on a South African Exchange.

Dividend payments by headquarter companies are not subject to Dividends Tax.

Dividends Tax replaced STC in an effort to:

  1. align South Africa with the international norm where the recipient of the dividend, not the company paying it, is liable for the tax (South Africa was one of only a few countries with a corporate-level tax on dividends, such as STC)
  2. make South Africa a more attractive destination for international investment by eliminating the perception of a higher corporate tax rate (STC is an extra corporate tax) coupled with lower accounting profits (STC had to be accounted for in the Statement of Comprehensive Income (Income Statement)).

Some beneficial owners of dividends are entitled to an exemption (local and/or foreign persons) or a reduced rate (foreign persons) under the Dividends Tax system, whereas dividends received by them under the STC system were taxed in full in the company declaring the dividend.

Dividends Tax is payable by the beneficial owner of the dividend but is withheld from the dividend payment and paid to SARS by a withholding agent. The person liable for the tax, however, remains ultimately responsible to pay the tax should the withholding agent fail to withhold the correct amount of tax. An exception to this general principle is where a dividend consists of a distribution of an asset in specie, resulting in the liability for the tax that falls on the company itself (such as with STC), which means that it may not withhold the tax from the dividend payment.

The rate of Dividends Tax increased from 15% to 20% for any dividend paid on or after 22 February 2017 (irrespective of the declaration date), unless an exemption or reduced rate is applicable.

SARS has two summaries of the Dividends Tax rates as per the South African Double Taxation Agreements currently in force and has been split into two parts, Africa and the rest of the world.

Dividends Tax applies to any dividend declared and paid from 1 April 2012 onwards, and the withholding agent (either the company or the regulated intermediary) should pay the tax withheld to SARS on or before the last day of the month following the month in which the dividend was paid. Dividends Tax payments should be accompanied by the submission of both the DTR01 and the DTR02 returns. Penalties and interest may be levied for late payments of dividends tax or the late submission of dividends tax returns.

As a shareholder (in either a company that is resident in South Africa or in a foreign company the shares of which are listed at a South African Exchange) you will become liable for the Dividends Tax when a dividend is paid to you. However, the relevant withholding agent will have to withhold and pay the tax to SARS. The withholding agent should also send you the required declaration and undertaking form(s) for completion if you wish to qualify for any of the exemptions or a reduced rate under a DTA (foreign residents only). The completed form must be sent to the withholding agent before it may exempt the dividend payment or withhold it at a reduced rate.

Dividends Tax and Secondary Tax on Companies

The main difference lies in who is liable for the tax. Dividends Tax is a tax levied on shareholders when they receive dividends, whereas STC was a tax levied on companies on the declaration of dividends. There is no overlap between STC and Dividends Tax. If a dividend was declared before 1 April 2012 (irrespective of the actual payment date) it was subject to STC. Only when the dividend is declared and paid on or after 1 April 2012 will it be subject to Dividends Tax.

Exemptions

Under Secondary Tax on Companies, the dividends declared by certain companies were exempt based on the status of the declaring company (section 10 exempt entities; fixed property companies; certain gold miners; intra-group; tax holiday companies and/or registered micro businesses).

Under Dividends Tax, the dividend payments could be exempt from Dividends Tax depending on the nature or status of the recipient. The exemptions are “elective” in the sense that they will only apply where the company distributing the dividend or regulated intermediary receives the required notifications (“declaration” and “undertaking” in the form prescribed by SARS) from the recipient prior to payment of the dividend. The recipient needs to submit both of the following:

  1. Declaration by Beneficial Owner
  2. Undertaking by Beneficial Owner – to inform SARS of future changes

Where the notifications as indicated are not submitted in time the withholding agent is required to withhold tax at the full rate. However, under these circumstances, the beneficial owner has three years to submit the required notifications and claim a refund from the person who withheld the Dividends Tax from the dividend payment.

Examples of exempt entities are:

  1. local companies;
  2. any of the three tiers of government;
  3. approved public benefit organisations (section 30(3) of the Act);
  4. mining rehabilitation trusts (section 37A of the Act); persons referred to in section 10(1)(cA) of the Act;
  5. pension, provident, preservation, retirement annuity, beneficiary, and benefit funds (section 10(1)(d)(i) and (ii) of the Act);
  6. persons referred to in section 10(1)(t) of the Act (CSIR, SANRAL etc);
  7. shareholder in a registered micro business (6th Schedule of the Act) insofar as the dividend does not exceed R200,000 per annum; non-resident beneficial owners of dividends received from SA-listed non-resident companies;
  8. portfolio of a collective investment scheme in securities; any person insofar as the dividend constitutes income of that person; any person insofar as the dividend was subject to STC;
  9. fidelity or indemnity funds (section 10(1)(d)(iii)); and a natural person/deceased estate/insolvent estate insofar as the dividend is paid in respect of a tax-free investment (section 12T(1)).

Cash dividends paid by Real Estate Investment Trusts (REITs) or “controlled property companies” (section 25BB) are exempt if received or accrued before 1 January 2014.

Some dividend payments are automatically exempt, i.e. do not require the beneficial owner to submit a declaration and undertaking form in order to qualify, and they are:

  1. Dividends paid to “group companies” as defined in section 41; and
  2. Dividends paid to regulated intermediaries as defined in section 64D.

Reduced rates for foreign residents

Under Dividends Tax, dividend payments to foreign residents may be subject to a reduced rate where the relevant Double Taxation Agreement (DTA) between South Africa and their country of residence provides for such. This normally requires the foreign beneficial owner to be a company and to hold between 10% and 25% of the share capital of the South African company paying the dividend. In order to qualify, the foreign resident needs to declare their status (by way of a similar “declaration” and “undertaking” referred to above) to the company declaring the dividend or the regulated intermediary involved – if they do not the withholding agent is required to withhold tax at the full rate (with similar refund rules as being applicable). Generally speaking, reduced rates were not possible under Secondary Tax on Companies.

The Tax Levy

Dividends Tax is triggered by the payment of dividends by any:

  1. South African tax resident company; or
  2. Foreign company in respect of shares listed on the JSE (excluding dividends in specie).

Under Secondary Tax on Companies, a declaration or deemed declaration of a dividend triggers the payment of STC, whereas under Dividends Tax it is the actual payment of the dividend or when an amount becomes due and payable (whichever is earlier) that triggers the payment of Dividends Tax. Where a debt is owing to the company (which arose by virtue of a share held in that company) during a year of assessment and an interest benefit is given in respect thereof the Dividends Tax is triggered on the last day of that year.

Dividends Tax is levied on:

  1. Amount distributed (normal/cash dividends)
  2. Value distributed (dividends in specie) – market value (not book/cost)

Dual-listed companies

For dual-listed companies (foreign resident companies with shares listed in South Africa), any foreign withholding taxes paid (without any right of recovery) on these dividends may be deducted from any Dividends Tax due (which did not apply under STC). The amount of the rebate cannot exceed the amount of the Dividends Tax payable, and the withholding agent must obtain proof of any such foreign taxes paid before a rebate may be allowed.

Refunds under the dividends tax dispensation

Refunds are dealt with differently under the new Dividends Tax dispensation as refunds should be claimed from and paid by the withholding agent (company or regulated intermediary) who withheld the Dividends Tax. Beneficial owners have a period of three years from the date of payment of the dividend to submit any outstanding documentation to the relevant party and claim a refund. Withholding agents should utilise any future Dividends Tax withheld by them as a source for the refunds. In limited circumstances (i.e. where the company was the withholding agent and future withholdings are insufficient, and at least a year has lapsed) the withholding agent may make a recovery claim from SARS (i.e. no direct refund claims by beneficial owners are allowed).

SARS has a “Dividends Tax: Summary of withholding tax rates per South African Double Taxation Agreements” summary on their website for the reader to also keep in mind when dealing with dividends tax.

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