The Minister of Finance in his Budget Review this year announced that foreign dividends became taxable with effect from 23 February 2000. The new provisions are contained in sections 1, 6quat, 9D, 9E, 64B, 64C and 70 of the Income Tax Act, No. 58 of 1962 and were enacted by the Taxation Laws Amendment Act, No. 30 of 2000. Similar provisions have been enacted in the Tax on Retirement Funds Act, No. 38 of 1996. The new provisions apply in respect of all foreign dividends accrued to or received by a resident (including inter alia natural persons, companies, close corporations, trusts, unit holders, estates, long-term insurers,short-term insurers, retirement funds) on or after 23 February 2000.
A foreign dividend is in broad terms defined as a dividend received by or which accrued to any person from a company to the extent that the dividend is declared from profits
Specific exemptions are provided for dividends from companies listed on the JSE and South African resident companies in certain circumstances. Foreign dividends received from profits generated in any designated country will be exempt to the extent that the underlying profits were subject to tax at a statutory rate of at least 27 per cent, where the resident holds a direct or indirect interest of 10 per cent or more in the company in which the profits were generated. A list of designated countries will be published in the Government Gazette shortly.
The basic exemption of interest income earned by natural persons has been extended to include the aggregate of interest and taxable dividend income. This exemption is deemed first to apply to foreign dividends and thereafter to interest income. The maximum exemption for the 2001 year of assessment is R3 000 for persons under 65 years and R4 000 for persons who are 65 years and older.
Taxpayers are allowed to elect on an annual basis that only the net amount of all dividends accrued during the year of assessment, after the deduction of foreign withholding tax, be included in the gross income of the recipient. Where a taxpayer has so elected to be taxed on the net amount of the dividend, it is not necessary to provide for foreign tax credits to be set off against the South African tax liability in respect of the foreign dividends.
Taxpayers should take foreign dividends into account when estimating their taxable income for the purpose of calculating the provisional tax payable from today in respect of any year of assessment ending on or after 29 February 2000.
Where the total amount of foreign dividends accrued to or received by a resident is included in the estimated taxable income of the person, the amount of the foreign tax imposed in respect thereof, may be claimed as a deduction against the provisional tax where the foreign tax has been paid on the date the provisional tax determination is due. As the return for payment of provisional tax (IRP 6) does not currently provide for such a deduction, taxpayers are requested to claim the foreign tax, if applicable, in the space provided for "Less: Employees' tax paid" for this period on the IRP 6 return.
A resident with a shareholding of less than 10 per cent in a company, will be taxed on the aggregate of the foreign dividend received and the withholding tax borne by the resident in respect of the foreign dividend (unless he elects to be taxed on the net amount). The withholding tax paid will then be allowed as a credit against the South African tax liability in respect of the foreign dividend.
Where a resident holds at least 10 per cent of the equity share capital of a company declaring a foreign dividend and the underlying profits were not taxed at a comparable rate and basis to that of South Africa in a designated country, the foreign dividend will be taxable and no exemption will apply. Foreign tax payable by companies in which the resident holds a direct or indirect interest of at least 10 per cent attributable to the profits from which the dividend was distributed will, however be allowed as a credit against the South African income tax payable. The amount to be taxed in the hands of a resident is not the actual dividend, but the grossed-up amount which is equivalent to the pre-tax profit out of which the dividend was declared. A credit will, however, be granted for both the corporate tax and withholding taxes paid in respect of that profit.
The proof of all foreign tax payable which is attributable to the foreign dividends included in the taxable income for the year of assessment, must be retained for a period of four years from the date upon which the return relevant to the foreign credits was received by the Commissioner for the South African Revenue Service.
To the extent that a foreign dividend is taxable for normal tax purposes, no deduction should be provided for the foreign dividend accrued in calculating the net amount of any dividend, which is subject to secondary tax on companies. To the extent that the foreign dividend is exempt from normal tax, such a foreign dividend should be deducted from dividends declared during the dividend cycle in the determination of secondary tax on companies. An exception to the last-mentioned rule is where a dividend accrued to a resident from a controlled foreign entity, to the extent that the underlying profits have already been imputed to the resident. That dividend will not be allowed as a deduction for the purposes of the determination of the liability for secondary tax on companies.
Where the foreign tax payable exceeds the South African income tax payable in respect of any foreign income, the excess amount may be set off against any secondary tax on companies which becomes payable after the determination of the excess amount, limited to an amount by applying the STC rate to the profits attributable to the inclusion of the foreign income. Where, however, an amount of investment income of a controlled foreign entity is imputed to a resident company, the excess foreign tax may be set off against such company's liability for secondary tax on companies imposed on the distribution of any dividend subsequent to the accrual of a dividend from the controlled foreign entity. This excess will, however, be limited to an amount determined by applying the rate of secondary tax on companies to the amount of taxable income attributable to the imputation of the income of the controlled foreign entity. Secondary Tax on Companies is calculated at a rate of 12,5 per cent of the net amount of any dividend declared on or after 14 March 1996.
A revised IT 56 (assessment for secondary tax on companies) will be available in due course. In the meantime, a separate schedule reflecting the calculation of any secondary tax on companies payable after taking any foreign credits into account, must be attached to the IT 56 which is currently in use.
ISSUED BY THE COMMISSIONER FOR THE SOUTH AFRICAN REVENUE SERVICE