Double Tax Agreements
What is a double tax agreement?
A double tax agreement is one that allows the required tax to be paid to be offset in one of two countries against tax payable in the other in doing so avoiding double taxation.
South Africa is a signatory to double tax treaties with several countries throughout the world. Some forms of income are exempt from tax or qualify for reduced rates. These include royalties, dividends and capital gains.
The purpose of the agreements between the two tax administrations of two countries is to enable the administrations to eliminate double taxation.
In terms of South African law, a double tax agreement is approved by Parliament and has the force of South African legislation. SARS’ opinion is that the relevant provisions of the Income Tax Act must be read in the context of the double tax agreement’s information exchange provisions.
The agreements divide up the taxing rights between the contracting countries, in situations where they might both claim such rights.
Another purpose to these agreements is the prevention of tax evasion by taxpayers of the contracting countries.
The prevention of tax evasion aspect requires the exchange of information by the two tax authorities.
Double tax treaties is a complex area of tax and application of rules differ between countries therefore it must be treated with caution and should always be professionally signed-off.
Note: tax treaty relief is something which must be claimed by a taxpayer and SARS must agree thereto. SARS would ask for a tax residency certificate before considering the double tax situation.
A list of signatory countries is given on the following SARS’ page: Double Tax Agreements
One example of a double tax agreement between South Africa and the United Arab Emirates (UAE) signed on 23 November 2015 is as follows:
With respect to passive income, the treaty limits withholding tax, where applicable, as follows:
• Dividends: 5% if the beneficial owner is a company, the capital of which is wholly or partly divided into shares which holds directly at least 10% of the capital of the company paying the dividends (10% in all other instances)
• Interest and royalties: 10% (with certain exemptions for interest)
A resident of the UAE will not be taxed on any South African business profits, unless it carries on business through a South African permanent establishment (PE).
It is interesting to note that:
• Article 13 (capital gains) does not include a paragraph dealing with the taxation of shares of companies deriving more than 50% of their value directly or indirectly from immovable property
• Although the treaty contains an article dealing with exchange of information, there is no article dealing with the assistance in the collection of taxes.
Author Craig Tonkin