TaxNewsFlash-Africa

October 21, 2009
No. 2009-12

South Africa: Effects of Dividends Tax on Distributions by Foreign Companies Listed on South Africa’s JSE

As previously noted (see TaxNewsFlash-Africa 2009-09), a dividends tax regime could be enacted and implemented towards the end of 2010. The new dividends tax law would not only seek to impose tax on dividends distributed by South African tax resident companies, but also on certain dividends distributed by foreign companies that have their shares listed on the JSE (South Africa’s premier stock exchange).

South African tax resident shareholders that accrue dividends from the JSE-listed shares of foreign companies would be subject to the dividends tax at a rate of 10%.

For example, assume a company incorporated in and a tax resident of the UK issues shares on the JSE to South African tax resident shareholders. The UK company then distributes a dividend. Under the dividends tax legislation, the dividends that accrue from the UK company to the South African tax resident shareholders that own shares on the JSE would be subject to the dividends tax at a rate of 10%.

Government’s Position on Dividend Tax

In paragraph 2.1 of the Media Statement issued on 20 February 2008 by National Treasury, the dividends tax is referred to as “a separate final withholding tax.” A withholding tax is typically a tax levied at source. The source of dividend income has been held to be where the share register is maintained.

In most instances, in situations when a foreign company has shares that are traded on the JSE, the foreign company would establish a branch register in South Africa, and the shares that are traded on the JSE would be issued off the South African branch register. The source of dividend income from a branch register can often be less certain, and may depend largely on the rules in the jurisdiction where the primary register is maintained. For example, in some countries, the law may deem the branch register to form part of the primary register, in which case the location of the primary register would determine the source of the dividends that flow from the branch register.

Proceeding on the assumption that it could be evidenced that the source of the dividend income is located in South Africa, observers have noted that it is still puzzling as to why National Treasury would be seeking to impose the dividends tax on such amounts.

Historically dividends accruing from these inward listed companies would typically be tax exempt in the hands of these taxpayers. This is because a foreign dividend exemption has long been part of the South African Income Tax Act to provide for the exempt status of dividend flows from companies that are listed on the JSE and a recognized foreign exchange (the Minister of Finance has issued this list). This means that if a South African taxpayer bought a share in one of the listed foreign companies, the dividends accruing from these companies were tax free.

The National Treasury has indicated it intends to maintain the exempt status of such dividend flows; over the past few months, the rules relating to the exemption have been relaxed (a 10% South African shareholder base is no longer required). Further, under the new dividends law, a single listing on the JSE would be sufficient to warrant exempt status. This means that shares of foreign companies would no longer have to be listed on a recognized exchange and the JSE for their dividends to qualify as tax exempt.

Provided the shares of the foreign companies are listed on the JSE, the dividends that flow from such companies are tax free. Moreover, as these companies are not South African tax residents, the STC (secondary tax on companies) is not imposed on dividend distributions made by these companies. The returns are therefore quite attractive relative to domestic dividends under the current regime.

Under the pending dividends tax regime, dividends flowing from these companies would continue to be exempt from normal tax in the hands of shareholders. However, when these dividends accrue to South African tax resident individual shareholders owning JSE-listed shares, the dividends would be subject to 10% tax. When the dividends accrue to South African resident companies, the dividends tax would be deferred until the South African company distributes the dividends to its ultimate shareholders.

Point 2 of the statement issue by National Treasury entitled “Taxation Laws Amendment Bills” suggests that the reason for imposing the dividends tax on these foreign dividends would be to “equal the playing field for both domestic and foreign shares listed on the JSE.” However it has been noted that in reality, what this would do is to broaden the tax base to amounts that are not currently taxed under the STC regime.

Withholding Issues

Many of these inward listed companies have operations (subsidiaries) that are conducting activities in South Africa. When these operations distribute their profits to their foreign parent company, under the legislation, the distributions would attract dividends tax at a rate of between 5% and 10% (depending on the provisions of an applicable double tax agreement). These same profits would then be on-distributed to the foreign parent company’s various shareholders, and in the case of South African tax resident shareholders that own their shares on the JSE, again dividends tax would be imposed. This means that profits of these companies generated from South Africa and distributed to JSE investors could be subject to an overall tax rate of 20%.

Moreover, parties would need to establish who is responsible for withholding the tax on such distributions. This obligation is likely to fall on the regulated intermediary that manages the dividend distributions to the investors. However, prudent foreign JSE-listed companies would investigate this issue and determine with certainty who is responsible for the withholding because in some instances, the requirement to withhold may be that of the foreign company.

For more information, contact a tax professional with KPMG in South Africa:

Michele Benetello, +27 (11) 647 7304, michele.benetello@kpmg.co.za

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