South Africa Corporate Tax Guide

South Africa

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Cape Town GMT +2

EY

+27 (21) 443-0200

Fax: +27 (21) 443-1200 P.O. Box 656

Mail address:

Cape Town 8000 South Africa

Street address: Waterway House 3 Dock Road V&A Waterfront Cape Town South Africa

International Tax and Transaction Services – International Corporate Tax Advisory

Ide Louw

+27 (11) 502-0438

Mobile: +27 82-300-6666 Email: ide.louw@za.ey.com

Business Tax Advisory and Global Compliance and Reporting

Russell Smith

+27 (21) 443-0448

Mobile: +27 83-256-2751

Fax: +27 (21) 443-1448 Email: russell.smith@za.ey.com

Paul Daniels +27 (21) 443-0653

Mobile: +27 71-600-7184 Email: paul.daniels@za.ey.com

Osman Mollagee +27 (11) 772-3000 Mobile: +27 82-202-3194 Email: osman.mollagee@za.ey.com

Indirect Tax

Redge de Swardt

+27 (21) 443-0200 Mobile: +27 82-776-3287 Email: redge.deswardt@za.ey.com

Durban GMT +2

EY +27 (31) 576-8000

Mail address:

P.O. Box 859 Durban 4000 South Africa

Street address: 1 Pencarrow Crescent La Lucia Ridge Office Estate Durban South Africa

Business Tax Advisory

Ekow Eghan

Fax: +27 (31) 576-8300

+27 (11) 772-3012

Mobile: +27 83-600-1425 Email: ekow.eghan@za.ey.com

EY

+27 (11) 772-3000

Mail address: Fax: +27 (11) 772-4000 P.O. Box 2322 Johannesburg 2000 South Africa

Street address: 102 Rivonia Road Sandton, Gauteng Johannesburg 2194 South Africa

Principal Tax Contact

 Ekow Eghan

+27 (11) 772-3012 Mobile: +27 83-600-1425 Email: ekow.eghan@za.ey.com

International Tax and Transaction Services – International Corporate Tax Advisory

Ekow Eghan

+27 (11) 772-3012 Mobile: +27 83-600-1425 Email: ekow.eghan@za.ey.com

Michiel Els +27 (11) 502-0392 Mobile: +27 83-256-7712 Email: michiel.c.els@za.ey.com

Wendy Gardner

+27 (11) 502-3988 Mobile: +27 83-611-1527 Email: wendy.gardner@za.ey.com Osman Mollagee +27 (11) 772-3000 Mobile: +27 82-202-3194 Email: osman.mollagee@za.ey.com

Global Compliance and Reporting

Natasha Meintjes

+27 (11) 772-3923 Mobile: +27 83-611-1859 Email: natasha.meintjes@za.ey.com

Mark Goulding +27 (11) 772- 5010 Mobile: +27 83-600-2249 Email: mark.goulding@za.ey.com

Business Tax Advisory

Stefan Botha,

+27 (11) 772-3000 Africa Financial Services Mobile: +27 82-447-6003 Email: stefan.botha@za.ey.com Alwina Brand, +27 (11) 772-3000 Africa Financial Services Mobile: +27 83-303-1727 Email: alwina.brand@za.ey.com

People Advisory Services

Elizabete da Silva

Indirect Tax

Leon Oosthuizen

+27 (11) 772-3931 Mobile: +27 83-601-1337 Email: elizabete.dasilva@za.ey.com

+27 (11) 772-3612 Mobile: + 27 83-307-1051 Email: leon.oosthuizen@za.ey.com

Certain amendments to the tax law have been proposed, but not yet enacted. Because of the expected changes to the tax law, readers should obtain updated information before engaging in transactions.

A. At a glance

Corporate Income Tax Rate (%) 28 (a)

Capital Gains Tax Rate (%) 22.4 (b)

Branch Tax Rate (%) 28 (a)

Withholding Tax (%)

Dividends 20 (c)

Interest 15 (d)(e)

Royalties from Patents, Know-how, etc. 15 (e)

Branch Remittance Tax 0

Net Operating Losses (Years)

Carryback 0

Carryforward Unlimited (f)

(a) The rate is reduced to 27% for tax years ending on or after 31 March 2023 (which in most cases will mean tax years starting on or after 1 April 2022). The mining income of gold mining companies is taxed under a special for mula, and the non-mining income of such companies is taxed at a rate of 28% (27% from 1 April 2022). Special rules apply to life insurance companies, petroleum and gas producers and small business corporations. See Section B. (b) This is the effective rate for companies. See Section B. (c) Dividend withholding tax applies to dividends paid by South African-resident companies. Certain dividends are exempt from the withholding tax, such as dividends received by South African-resident companies and public benefit organizations. A decreased rate may apply under a double tax treaty. See Section B.

(d) Interest withholding tax applies only to interest paid to nonresidents. Certain interest income is exempt from this withholding tax, including interest with respect to government debt instruments, listed debt instruments and debt in struments owed by banks. A reduced rate may apply under a double tax treaty.

(e) Royalties withholding tax applies only to royalties paid to nonresidents, subject to certain exemptions. A reduced rate may apply under a double tax treaty.

(f) See Section C.

B. Taxes on corporate income and gains

Company tax. A residence-based tax system applies in South Africa. Under domestic legislation, companies are resident in South Africa if they are incorporated in South Africa or have their place of effective management in South Africa.

South African-resident companies are taxed on their worldwide income (including capital gains).

Under complex look-through rules, the income of nonresident subsidiaries in foreign countries is taxed in the hands of the immediately cross-border South African-resident parent compa ny on an imputation basis (see the discussion on controlled for eign companies [CFCs] in Section E). The income of nonresident subsidiaries with “foreign business establishments” in foreign countries is generally exempt from the look-through rules, subject to complex anti-avoidance exceptions. Dividends paid by foreign companies that are not CFCs are taxable unless the share holding of the South African-resident recipient is 10% or more (see the discussion of foreign dividends in Dividends).

Nonresident companies are taxed on their South African-source income only.

Tax rates. The normal corporate income tax rate in South Africa is 28%. South African branches of nonresident companies are

1628 s ou T h a frica

also taxed at 28% on South African-source income. The rate is reduced to 27% for company tax years ending on or after 31 March 2023, which in most cases means tax years starting on or after 1 April 2022.

Dividend withholding tax. A withholding tax is imposed at a rate of 20% on cash and in specie dividends paid.

A dividend is any amount transferred or applied by a company for the benefit of its shareholders, whether by way of a distribution or as consideration for a share buyback, excluding the fol lowing:

• Amounts that result in a reduction of the contributed tax capital of the company

• Shares in the company

• An acquisition by a listed company of its own shares through a general repurchase of shares in accordance with the Johannesburg Stock Exchange (JSE) listing requirements

The tax applies to dividends paid by South African-resident com panies (other than headquarter companies) or with respect to cash dividends paid by foreign companies on shares listed on the JSE. Although the tax is imposed on the recipient of a dividend (in the case of a cash dividend), the declaring company must withhold the tax from the dividend paid and pay the tax to the South African Revenue Service (SARS) on behalf of the recipient. In the case of a listed company, a regulated intermediary withholds the tax.

Dividends are not subject to the withholding tax if any of the fol lowing circumstances, among others, exists:

• The beneficial owner is a resident company.

• The beneficial owner is a local, provincial or national govern ment.

• The beneficial owner is a specified tax-exempt entity.

• The beneficial owner is an environmental rehabilitation trust.

• The beneficial owner is an institution, board, body, fund (such as a pension fund) or person that meets specific requirements.

• The dividend is paid by a micro business, up to ZAR200,000.

• The dividend is paid by a foreign company listed on the JSE to a nonresident beneficial owner.

• The dividend is taxable in nature.

A paying company does not withhold the dividends tax if the beneficial owner has supplied it with a written declaration stating the following:

• It is exempt from the dividends tax.

• It will inform the company when it is no longer the beneficial owner of the shares.

If the beneficial owner is a nonresident that wants to rely on a reduced dividends tax rate under a double tax treaty between South Africa and its country of residence, it must provide the company with a written declaration that the reduced rate applies and specified undertakings.

If the dividend is a distribution in specie, the tax is imposed on the declaring company.

Special types of companies. The mining income of gold mining companies is taxed under a special formula, while the non-mining

income of such companies is taxed at a rate of 28% (to be reduced to 27%).

Oil and gas production is taxed in accordance with the usual provisions of the Income Tax Act, as modified by a special schedule applicable to exploration and certain post-exploration activities. A fiscal stability regime can be agreed to with the Minister of Finance. The tax rate is capped at a maximum of 28% (to be reduced to 27%) for both South African-resident and non resident companies. Dividends tax need not be withheld from dividends paid out of oil and gas income, and interest withhold ing tax need not be withheld from interest paid with respect to loans used to fund oil and gas exploration and post-exploration capital expenditure.

Life assurance companies are subject to special rules that sepa rate the taxation of policyholders’ and corporate funds and apply different tax rates to such items.

Small business corporations (SBCs) are taxed at the following rates on their taxable income:

• 0% on the first ZAR87,300 of taxable income

• 7% of the amount of taxable income exceeding ZAR87,300 but not exceeding ZAR365,000

• ZAR19,439 plus 21% on taxable income exceeding ZAR365,000 but not exceeding ZAR550,000

• ZAR58,289 plus 28% on taxable income exceeding ZAR550,000

To qualify as an SBC, a company must satisfy all of the following requirements:

• Its gross income for the year must not exceed ZAR20 million.

• Its shares must be held by individuals who do not hold interests in other companies (except for certain specified interests such as interests in South African-listed companies).

• Its total personal service and investment income must not ex ceed 20% of its gross income.

• It is not a personal service provider.

Capital gains. Capital gains derived by resident companies are subject to capital gains tax (CGT) at an effective rate of 22.4% (the normal corporate tax rate of 28% is applied to only 80% of the net capital gain). When the corporate tax rate is reduced to 27%, the effective CGT rate will be 21.6%.

Resident companies are subject to CGT on capital gains derived from disposals of worldwide tangible and intangible assets.

Nonresidents are subject to CGT on capital gains derived from the disposal of the following:

• Fixed property (land and buildings)

• Interests in fixed property located in South Africa (such as land-rich companies), including rights to variable or fixed pay ments as consideration for the working of or the right to work mineral deposits, sources and other natural resources

• Assets effectively connected with a permanent establishment located in South Africa

An interest in fixed property includes a direct or indirect interest of at least 20% in a resident or nonresident company if, at the time of disposal of the interest, 80% or more of the market value

of the assets of the company is attributable to fixed property located in South Africa.

A capital gain is equal to the amount by which the disposal pro ceeds for an asset exceed the base cost of the asset. A capital loss arises if the base cost exceeds the disposal proceeds. Capital losses may offset capital gains, and regular income losses may offset net capital gains. However, net capital losses may not offset regular income but may be carried forward for setoff against future capital gains.

The base cost for an asset includes the sum of the following:

• The amount actually incurred to acquire the asset

• Cost of the valuation of the asset for the purposes of determin ing the capital gain or loss

• Expenditure directly related to the acquisition or disposal of the asset, such as transfer costs, advertising costs, costs of moving the asset from one location to another and cost of installation

• Expenditure incurred to establish, maintain or defend the legal title to, or right in, the asset

• Expenditure on improvement costs (if the improvement is still in existence)

The base cost is reduced by any amounts that have been allowed as income tax deductions with respect to the disposed asset. It is also reduced by the following amounts if such expenditure was origi nally included in the base cost:

• Expenditure that is recoverable or recovered

• Amounts paid by another person

• Amounts that have not been paid and are not due in the tax year

Inflation indexation of the base cost is not allowed.

Special rules apply to the base cost valuation of an asset acquired before 1 October 2001.

A disposal is defined as an event that results in, among other things, the creation, variation or extinction of an asset. It includes the transfer of ownership of an asset, the destruction of an asset and the distribution of an asset by a company to a shareholder. For CGT purposes, a company does not dispose of assets when it issues shares or when it grants an option to acquire a share or debenture in the company.

The proceeds from the disposal of an asset by a taxpayer are equal to the amount received by, or accrued to, the taxpayer as a result of the disposal less any amount that is or was included in the taxpayer’s taxable income for income tax purposes. If a company makes a dividend distribution of an asset to a shareholder, it is deemed to have disposed of the asset for proceeds equal to the asset’s market value.

Rollover relief is available in certain circumstances including destruction of assets and scrapping of assets.

Related-party transactions may be deemed to occur at market value, and restrictions are imposed on the claiming of losses incurred in such transactions.

Corporate emigration (cessation of tax residence), which could occur when the company’s place of effective management is moved outside South Africa, triggers four separate “exit” charg es. First, there is a deemed disposal at market value of the assets of the company, resulting in a CGT and/or normal corporate income tax charge. Secondly, there is a deemed dividend in spe cie, potentially resulting in dividend tax liability. The amount of the dividend in specie is deemed to be equal to the sum of the market values of all the shares in that company on that date less the sum of the contributed tax capital of all the classes of shares in the company as of that date. Alternatively, if the deemed divi dend qualifies for certain exemptions, the shareholder(s) of the migrating company might be deemed to have disposed of the shares (held in the migrating company), potentially resulting in a CGT liability for the shareholder(s). The third and fourth exit charges arise from the reversal of participation exemptions claimed by the migrating company in the last three years before migration, resulting in additional CGT (on previously exempt foreign share-disposals) and/or normal corporate income tax (on previously exempt foreign dividend income).

Subject to certain exceptions, disposals of equity shares in foreign companies to third-party nonresidents are exempt from CGT if the disposing party has held at least 10% of the equity in the foreign company for at least 18 months.

Administration. The Tax Administration Act governs the adminis tration of most taxes in South Africa.

The tax year for a company is its financial year. A company must file its annual tax return in which it calculates its taxable income and capital gains, together with a copy of its audited financial statements, within 12 months after the end of its financial year The SARS issues an official assessment based on the annual return.

The company must pay the balance of tax due after deduction of provisional payments within a specified period after receipt of the assessment.

Companies must pay provisional tax in two installments during their tax year. The first must be paid by the end of the sixth month of the tax year (the seventh month if the tax year begins on 1 March) and the second by the end of the tax year. The second payment must generally be accurate to within 80% of the actual tax for the year. A third (“topping up”) payment may be made within six months after the end of the tax year. If this payment is not made and if there is an underpayment of tax, interest is charged from the due date of the payment. A 20% penalty is charged if the total provisional tax paid for the year does not fall within certain prescribed parameters.

Tax penalties fall into two broad categories, which are for specified noncompliance (penalty can range between ZAR250 and ZAR16,000 per month) and understatement (penalty can range between 5% and 200% of the shortfall).

The SARS “eFiling” system allows provisional payments and tax returns to be submitted electronically, as well as for the many

other interactions (information uploads, payments and others) to happen online.

Dividends

South African dividends. Dividends paid by South African-resident companies are generally exempt from normal corporate income tax in the hands of the recipients. Accordingly, recipients may, in most cases, not deduct expenses relating to the earning of these dividends, such as interest and other expenses incurred on the acquisition of their shares (although there is an exception for certain corporate acquisitions.

Foreign dividends. Foreign dividends are dividends paid by nonresident companies and headquarter companies. Most foreign dividends accruing to or received by South African residents are taxable. The following foreign dividends are exempt from tax:

• Dividends paid by a foreign company to a South African resi dent holding at least 10% of the equity shares and voting rights in the foreign company (participation exemption), unless the dividend paid by the foreign company is deductible for purposes of determining its tax liability in that foreign country (specific anti-avoidance measures may limit the exemption if foreign dividends arise from active foreign business operations)

• Dividends paid by a CFC to a South African resident (subject to certain limitations)

• Cash dividends paid by a foreign company that is listed in South Africa

• Dividends paid by a foreign company to another foreign com pany that is resident in the same country as the payer, unless the dividend paid by the foreign company is deductible for the pur poses of determining its tax liability in that country

For foreign dividends that are not exempt, a foreign tax credit (rebate) may be claimed by South African resident recipients. The rebate is limited to the amount of South African tax attribut able to the foreign dividend. Any excess of the foreign tax over the allowable rebate may be carried forward for a period of seven years. The excess taxes are available for setoff against foreignsource income in subsequent years (the calculation is done on a pooled basis).

Recipients of foreign dividends that are not exempt are taxed on a formula basis, resulting in an effective tax rate of 20%, as opposed to the standard corporate income tax rate of 28% (or 27%).

Withholding tax. Dividend withholding tax at a rate of 20% is imposed, subject to applicable treaty rates. For further details, see Dividend withholding tax.

Foreign tax relief. In the absence of treaty relief provisions, unilat eral relief is granted through a credit for foreign taxes paid on foreign income and taxable capital gains, including income at tributed under the CFC rules (see Section E) or trust attribution rules. The credit is limited to the lesser of the actual foreign tax liability and the South African tax on such foreign income. The credit may be claimed only if the income is from a non-South African source. Excess credits may be carried forward, but they are lost if they are not used within seven years.

Foreign taxes levied on income from a South African source that cannot be claimed as a tax credit can generally be claimed as a deduction from taxable income.

C. Determination of trading income

General. The assessment to tax is based on taxable income deter mined in accordance with the Income Tax Act.

To be eligible for deduction, expenditures must be actually incurred in the production of income and for purposes of trade, and must not be of a capital nature.

Prepayments of insurance, rent and certain other items may not be deducted in full in the tax year of payment unless either of the following applies:

• The related service or other benefit is enjoyed within six months after the end of the tax year of payment.

• The aggregate of such expenditure is less than ZAR100,000.

Inventories. Inventory is valued at the lower of cost or net realiz able value. Last-in, first-out (LIFO) is not an acceptable method of valuation for tax purposes. Appropriate overhead expenses must be included, in the valuation of inventory. Special rules apply to construction work in progress. Consumable stores and spare parts may be included in inventory.

Tax depreciation (capital allowances)

Industrial plant and machinery. New plant and machinery that is brought into use in a manufacturing or similar process by other businesses is depreciated at a rate of 40% in the first year and at a straight-line rate of 20% for the second, third and fourth years. Used machinery or plant used in such a process qualifies for a 20% allowance per year over five years. The same allowances apply to foundations for plant and machinery if they are built specifically for particular machines and have a useful life limited to the life of the relevant machine.

SBCs (see Section B) qualify for a 100% deduction of the cost of new or used plant or machinery that is first brought into use in a manufacturing or similar process. For other plant or machinery of an SBC, the following allowances are granted:

• 50% in the first year of use

• 30% in the second year of use

• 20% in the third year of use

Industrial buildings. A 5% annual straight-line allowance is granted on the cost of the construction of, and improvements to, industrial buildings erected by a taxpayer. Purchased industrial buildings generally qualify for annual straight-line allowances on the purchase price paid, excluding the amount attributable to the land, at the following rates:

• 2% if originally constructed before 1 January 1989

• 5% if constructed during the period of 1 January 1989 through 30 June 1996

• 10% if constructed during the period of 1 July 1996 through 31 March 2000

• 5% if constructed after 1 April 2000

Hotels. Construction of and improvements to hotels qualify for a 5% straight-line allowance. However, capital expenditure on the internal renovation of hotels qualifies for straight-line deprecia tion at an annual rate of 20%.

Urban renewal. The cost of erecting new buildings or renovating (including extension) old buildings in certain depressed urban areas qualifies for allowances if the building is used by the tax payer for the taxpayer’s own trade or is leased for commercial or residential purposes. If the building is new or significant exten sions are made to an existing building, the allowance is 25% in the year of first occupation, 13% per year for the five succeeding years and 10% in the following year. If a building is renovated and if the existing structural or exterior framework is preserved, the allowance is 25% per year for four years. The allowances have been adjusted over the years. As a result, different rules may be in effect for improvements undertaken in previous tax years.

Renewable energy plant and machinery. Costs incurred with respect to the acquisition and construction of plant and machin ery used in the generation of renewable energy qualify for allow ances (based on certain criteria) at the following rates:

• 50% in the first year of use

• 30% in the second year of use

• 20% in the third year of use

Other commercial buildings. An allowance of 5% of the cost is generally available on commercial buildings not qualifying for any of the above allowances.

Wear-and-tear allowance for movables. An annual “wear-and-tear” tax depreciation allowance on movable items may be calculated using the declining-balance method or the straight-line method, but the straight-line method is generally preferred by the revenue authority. The allowance may be claimed based on the value (gen erally the cost) of movable non-manufacturing machinery and equipment used by the taxpayer for the purposes of its trade. Rates for the wear-and-tear allowance are not prescribed by statute, but certain periods of depreciation are generally accepted by the tax authorities. The following are some of the acceptable periods of straight-line depreciation.

Asset Years

Aircraft (light passenger, commercial and helicopters)

Computers (mainframe)

Computers (personal computers)

Computer software (mainframes)

Purchased

Self-developed

Computer software (personal computers)

Furniture

Passenger cars

Heavy duty trucks

Apportionment of the wear-and-tear allowances is required for assets acquired during the course of a year.

Any asset costing ZAR7,000 or less may be written off in full in the year of acquisition of the asset.

Special capital allowances. Subject to the approval of the Minister of Science and Technology (Innovation), the cost of developing and registering patents, designs, copyrights or similar property, and related know-how and of discovering novel scientific and technological information qualifies for a 150% deduction in the year in which the costs are incurred.

The acquisition cost of patents, copyrights and similar property (other than trademarks) and of related know-how is deductible at a rate of 5% per year. The cost of designs is deductible at a rate of 10% per year.

The cost of goodwill and trademarks is not depreciable for tax purposes.

Deductions with respect to restraint of trade payments are allowed over the period of restraint, with a minimum period of three years.

A 10% annual allowance is granted for the cost of new and unused pipelines used for transportation of natural oil, gas and refined products.

A 5% annual allowance is granted for the following:

• Water pipelines and electrical lines

• Railway lines used for the transportation of persons, goods and other items

Other special capital allowances are provided for expenditures on ships and aircraft, hotel equipment, scientific research, employee housing, plant and machinery of small business corporations (see Section B), aircraft hangars, aprons, runways and taxiways, and solar, wind and tidal equipment for the generation of electricity, as well as for certain capital expenditures for mining and agricul ture, which are deductible in full against mining and agricultural income.

Recapture. The amount of tax depreciation claimed on an asset may be recouped (recaptured) when the asset is sold. In general, the amount recouped is the excess of the selling price over the tax value, but it is limited to the amount of tax depreciation claimed.

Groups of companies. Companies in a group may not share their tax losses with other profitable companies in the group.

Special rules provide income tax and CGT relief for transactions between 70%-held group companies and between shareholders and their companies. These transactions include the following:

• Asset-for-share transactions

• Amalgamation transactions

• Substitutive share-for-share transactions

• Intragroup transactions

• Unbundling transactions

• Transactions relating to the liquidation, winding up and dereg istration of companies

Relief for losses. Tax losses may not be carried back but may be carried forward indefinitely, provided there is trading in every tax year. For tax years ending on or after 31 March 2023 (which in most cases means tax years starting on or after 1 April 2022), the utilization of losses will be limited to 80% of current-year tax able income (or ZAR1 million, if higher). This means that normal corporate income tax will be paid on at least 20% of current-year

taxable income. This does not impact the indefinite carryforward of unutilized losses.

Foreign tax losses may be offset against foreign income only. If a foreign tax loss exceeds foreign income, the excess may be car ried forward to offset foreign income in future years for an unlim ited period.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)

Value-added tax, levied on supply of a wide range of goods and services Standard rate 15 Disposals of going concerns and certain exports 0 Skills development levy, on remuneration

Securities transfer tax; levied on the transfer of listed and unlisted securities 0.25

E. Miscellaneous matters

Foreign-exchange controls. The exchange control regime seeks to monitor and manage the outflow of capital from South Africa and to ensure a measure of stability in currency markets.

In general, some form of permission must be obtained either from an authorized dealer (for example, one of the commercial banks) or from the Financial Surveillance Department of the South African Reserve Bank (SARB) for the remittance of crossborder payments. The SARB has been gradually relaxing foreign-exchange controls.

Debt-to-equity rules. Transfer-pricing principles also extend to thin capitalization. Both the interest rate and the amount of a loan must be based on arm’s-length principles. There is currently no safe harbor, and each company must consider its debt-equity mix on an arm’s-length basis. Certain exclusions exist (for example, certain headquarter company transactions). South Africa also has stand-alone interest limitation provisions that limit deductions based on a formulaic approach. This limitation determination is directly dependent on South Africa’s base “repo” rate. For 202122, the amount roughly equals 30% of taxable income (with ad justments largely intended to match cash flow, subject to a ceiling of 60%).

Transfer pricing. The transfer-pricing provisions, relying on the arm’s-length principle, apply with respect to any cross-border transaction, operation, scheme, agreement or understanding that are concluded between, or for the benefit of connected persons. Primary and secondary adjustments apply where parties are not transacting at arm’s length. The following are key aspects of the legislation:

• Affected transaction means any transaction, operation, scheme, agreement or understanding entered into or effected between or for the benefit of connected parties, as defined, and the terms or conditions are different from arm’s-length terms or condi tions.

• The arm’s-length principle applies to financial transactions.

• If there is a transfer-pricing adjustment, a secondary adjustment is also triggered in the form of a deemed dividend in specie to a company, attracting dividends tax at a rate of 20%.

• In general, the SARS accepts the application of the OECD Transfer Pricing Guidelines. Regarding documentation, the adoption of rules largely in line with Chapter V (Documentation) have been formalized into domestic law (including Country-byCountry Report, Master File and Local File).

Anti-avoidance legislation. In addition to transfer-pricing rules (see Transfer pricing), South African law contains general antiavoidance provisions that target “impermissible tax avoidance arrangements.” Broadly, an impermissible tax avoidance arrangement is an arrangement that seeks to achieve a tax benefit as its sole or main purpose and was entered into in a manner that would not normally be employed for bona fide business purposes, lacks commercial substance or misuses or abuses other provisions of the tax law. The SARS has wide powers in determining the tax con sequences of an impermissible tax avoidance arrangement.

Controlled foreign companies. The controlled foreign company (CFC) legislation regulates the taxation of certain income of CFCs. Key aspects of the legislation are described below.

An amount determined with reference to the CFC’s net income, including capital gains, may be imputed proportionately to any South African resident (other than a headquarter company) that holds an interest of 10% or more in that CFC. The net income is calculated using South African tax principles, but generally ig noring passive income flows between CFCs in a 70%-held group.

A foreign company is considered a CFC if any of the following circumstances exists:

• South African residents, other than headquarter companies (see Headquarter companies), directly or indirectly hold more than 50% of the participation rights in that foreign company.

• More than 50% of the voting rights in that foreign company is directly or indirectly exercisable by one or more residents.

• The financial results of that foreign company are reflected in the consolidated financial statements (prepared in terms of International Financial Reporting Standards 10) of any com pany that is a resident other than a headquarter company.

There are additional rules dealing with indirect holdings through, for example, listed companies.

A CFC’s income is exempt from imputation to the extent that it is attributable to a “foreign business establishment” (FBE) of that CFC. In broad terms, an FBE is a fixed place of business that is suitably equipped with on-site operational management, employ ees, equipment and other facilities for conducting the primary operations of the business and that is used for a bona fide business purpose and not for tax avoidance (the place of business may be located elsewhere than in the CFC’s home country). Several anti-avoidance exceptions exist with respect to the measure described in this paragraph. Also, if the tax payable to a foreign government equals at least 67.5% of the tax liability that would

have arisen in South Africa, no income needs to be imputed into the resident’s taxable income due to reliance on a high-tax exemption. There are also other exemptions for specific types of income in certain circumstances.

See Section B for information regarding foreign attributable tax credits and carryforward rules.

Headquarter companies. The headquarter company regime was introduced to encourage foreign companies to use South Africa as their base for investing in Africa. Broadly, headquarter compa nies are exempt from withholding taxes on dividends, interest and royalties.

A headquarter company is a South African-resident company that has elected to be treated as a headquarter company and that satis fies all of the following conditions:

• Each shareholder (alone or together with any company forming part of the same group of companies) holds 10% or more of the equity shares and voting rights in the headquarter company.

• At least 80% of the cost of the headquarter company’s assets (excluding cash) is attributable to investments in equity shares, loans or advances, or intellectual property (IP) in nonresident companies (investee companies) in which the headquarter company holds an equity interest of at least 10%.

• If the gross income of the company exceeds ZAR5 million, at least 50% of that gross income must consist of rentals, divi dends, interest, royalties and service fees received from the foreign investee companies contemplated above, or proceeds from the sale of equity shares or IP in such foreign companies. There are certain exclusions regarding foreign-exchange gains or losses.

A headquarter company also has certain reporting requirements. The CFC imputation rules do not apply to headquarter companies, but these companies are essentially transparent for the purposes of the CFC rules. If more than 50% of the headquarter company’s shares is held by South African residents, the underlying foreign subsidiaries of the headquarter company might still be CFCs in the hands of those South African residents. As a result of this concession, the net income of the headquarter company’s CFCs is not taxed in its hands, but in the hands of the ultimate sharehold ers if they are South African residents.

Headquarter companies are also exempt from the transfer pricing rules with respect to financial assistance and IP licensing granted to the foreign investee companies. In the case of back-to-back debt or IP arrangements (for example, the headquarter company borrows from a related foreign lender to on-lend to a foreign in vestee company), both legs of the transaction are exempt from the transfer pricing rules, but the headquarter company would not be permitted to create losses with such back-to-back arrangements.

F. Treaty withholding tax rates

The rates reflect the lower of the treaty rate and the withholding rate under domestic tax law.

Algeria

Dividends (a) Interest (b) Royalties (c) % % %

10/15 (s) 0/10 (aa) 10 (e)

Australia 5/15 (rr) 0/10 (aa) 10

Austria 5/15 (l) 0 0

Belarus 5/15 (l) 5/10 (bb) 5/10 (pp)

Belgium 5/15 (l) 0/10 (cc) 0 (e)

Botswana 10/15 (s) 0/10 (gg) 10 (e)

Brazil 10/15 (s) 0/15 (dd) 10/15 (j)

Bulgaria 5/15 (l) 0/5 (ee) 5/10 (i)

Cameroon 10/15 (s) 0/10 (aa) 10

Canada 5/15 (t) 10 6/10 (e)(f)

Chile 5/15 (l) 5/15 (ss) 5/10 (qq)

China Mainland 5 0/10 (gg) 7/10 (e)(g)

Congo (Democratic Republic of)

5/15 (l) 0/10 (gg) 10 (e)

Croatia 5/10 (m) 0 5 (e)

Cyprus 5/10 (k) 0 0 (e)

Czech Republic 5/15 (l) 0 10 (e)

Denmark 5/15 (l) 0 0 (e)

Egypt 15 0/12 (hh) 15 (e)

Eswatini 10/15 (s) 0/10 (gg) 10 (e)

Ethiopia 10 0/8 (ii) 20 (e)

Finland 5/15 (t) 0 0 (e)

France 5/15 (t) 0 0 (e)

Germany 7.5/15 (n) 10 (ff) 0

Ghana 5/15 (t) 5/10 (jj) 10 (e)

Greece 5/15 (l) 0/8 (ii) 5/7 (h)

Grenada 0

Hong Kong 5/10 (t) 10 5 (e)

Hungary 5/15 (l) 0 0 (e)

India 10 0/10 (gg) 10 (e)

Indonesia 10/15 (w) 0/10 (gg) 10 (e)

Iran 10 5 10 (e)

Ireland 5/10 (k) 0 0 (e)

Israel 20 15 0/15 (d)

Italy 5/15 (l) 0/10 (gg) 6 (e)

Japan 5/15 (x) 0/10 (gg) 10 (e)

Kenya 10 10 10

Korea (South) 5/15 (l) 0/10 (gg) 10 (e)

Kuwait 0 0 10 (e)

Lesotho 10/15 (w) 10 10 (e)

Luxembourg 5/15 (l) 0 0 (e)

Malawi 20 10 15

Malaysia 5/10 (m) 0/10 (gg) 5

Malta 5/10 0/10 (gg) 10 (e)

Mauritius 5/10 (t) 10 5 (e)

Mexico 5/10 (k) 0/10 (kk) 10

Mozambique 8/15 (o) 0/8 (ii) 5

Namibia 5/15 (l) 10 10

Netherlands 5/10 (k) 0 0

New Zealand 5/15 (l) 0/10 (gg) 10

Nigeria 7.5/10 (r) 0/7.5 (ll) 7.5 (e)

Norway 5/15 (l) 0 0 (e)

Oman 5/10 0 8

Pakistan 10/15 (w) 0/10 (gg) 10 (e)

Poland 5/15 (l) 0/10 (gg) 10

Dividends (a) Interest (b) Royalties (c) % % %

Portugal 10/15 (y) 0/10 (gg) 10

Qatar 5/10 (k) 10 5

Romania 15 15 15

Russian Federation 10/15 (z) 0/10 (gg) 0

Rwanda 10/20 (u) 0/10 (gg) 10

Saudi Arabia 5/10 (k) 5 10

Seychelles 5/10 (k) 0 0

Sierra Leone 0

Singapore 5/10 (k) 7.5 5 (e)

Slovak Republic 5/15 (l) 0 10

Spain 5/15 (l) 5 (mm) 5 (e)

Sweden 5/15 (t) 0 0 (e)

Switzerland 5/15 (q) 5 0

Taiwan 5/15 (t) 10 10 (e)

Tanzania 10/20 (v) 0/10 (gg) 10

Thailand 10/15 (s) 0/10/15 (nn) 15

Tunisia 10 0/5/12 (oo) 10

Turkey 10/15 (s) 0/10 (gg) 10

Uganda 10/15 (s) 0/10 (gg) 10 (e)

Ukraine 5/15 (q) 0/10 (gg) 10

United Arab Emirates

5/10 (k) 10 10 (e)

United Kingdom 5/10/15 (p) 0 0 (e)

United States 5/15 (t) 0 0 (e)

Zambia Zimbabwe 5/10 (m) 5 10 (e)

Non-treaty jurisdictions 20 15 15

(a) Dividends are subject to withholding tax in South Africa at a rate of 20%, unless reduced by tax treaties as shown in the table above.

(b) Interest withholding tax at a rate of 15% applies to South African-source interest paid to nonresidents. Certain exemptions and exclusions apply. Domestic rates can be reduced by tax treaties as shown in the table above.

(c) Royalties withholding tax at a rate of 15% applies to South African-source royalties paid to nonresidents. Certain exemptions and exclusions apply. Domestic rates can be reduced by tax treaties as shown in the table above.

(d) In general, royalties are exempt if they are subject to tax in Israel. For film royalties, however, the rate is 15%.

(e) The rate applies only if the recipient is the beneficial owner of the royalties.

(f) The 6% rate applies to royalties paid for copyrights of literary, dramatic, musical or other artistic works (excluding royalties with respect to motion picture films, works on film or videotape or other means for use in connec tion with television broadcasting), as well as for the use of, or the right of use, computer software, patents or information concerning industrial, commercial or scientific experience (excluding information provided in connection with a rental or franchise agreement). The 10% rate applies to other royalties.

(g) The 10% rate applies to royalties paid for copyrights of literary, artistic or scientific works, including cinematographic films, tapes, discs, patents, knowhow, trademarks, designs, models, plans or secret formulas. The 10% rate applies to the “adjusted amount” of royalties paid (that is, 70% of the gross amount of royalties) for industrial, commercial or scientific equipment. This effectively provides a 7% rate on the gross royalties paid.

(h) The 5% rate applies to royalties paid for copyrights of literary, artistic and scientific works. The 7% rate applies to royalties paid for patents, trademarks, designs, models, plans or secret formulas, as well as for industrial, commer cial or scientific equipment.

(i) The 5% rate applies to royalties paid for copyrights of cultural, dramatic, musical or other artistic works or for industrial, commercial and scientific equipment. The 10% rate applies to other royalties.

(j) The 15% rate applies to royalties paid for the use of trademarks. The 10% rate applies to other royalties.

(k) The 5% rate applies if the beneficial owner is a company that owns at least 10% of the shares. The 10% rate applies to other dividends.

(l) The 5% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 15% rate applies to other dividends.

(m) The 5% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 10% rate applies to other dividends.

(n) The 7.5% rate applies if the beneficial owner is a company that owns at least 25% of the shares or voting power. The 15% rate applies to other dividends.

(o) The 8% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 15% rate applies to other dividends.

(p) The 5% rate applies if the beneficial owner is a company that owns at least 10% of the shares. The 15% rate applies to qualifying dividends paid by a property investment company that is a resident of a contracting state. The 10% rate applies to other dividends.

(q) The 5% rate applies if the beneficial owner is a company that owns at least 20% of the shares. The 15% rate applies to other dividends.

(r) The 7.5% rate applies if the beneficial owner is a company that owns at least 10% of the shares or voting power. The 10% rate applies to other dividends.

(s) The 10% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 15% rate applies to other dividends.

(t) The 5% rate applies if the beneficial owner is a company that owns at least 10% of the shares. The higher rate applies to other dividends.

(u) The 10% rate applies if the beneficial owner is a company that owns at least 25% of the shares. The 20% rate applies to other dividends.

(v) The 10% rate applies if the beneficial owner is a company that owns at least 15% of the shares. The 20% rate applies to other dividends.

(w) The 10% rate applies if the beneficial owner is a company that owns at least 10% of the shares. The 15% rate applies to other dividends.

(x) The 5% rate applies if the beneficial owner is a company that owns at least 25% of the voting shares of the company paying the dividends during the six-month period immediately before the end of the accounting period for which the distribution of profits takes place. The 15% rate applies to other dividends.

(y) The 10% rate applies if the beneficial owner is a company that owns at least 25% of the shares for an uninterrupted period of two years before the pay ment of the dividend. The 15% rate applies to other dividends.

(z) The 10% rate applies if the beneficial owner is a company that owns at least 30% of the shares in the company paying the dividends, and holds a mini mum direct investment of USD100,000 in that company. The 15% rate ap plies to other dividends.

(aa) The 0% rate applies to government institutions and unrelated financial in stitutions. The 10% rate applies in all other cases.

(bb) The 5% rate applies to banks or other financial institutions. The 10% rate applies in all other cases.

(cc) The 0% rate applies to commercial debt claims, public financial institu tions or public entities under a scheme for the promotion of exports, loans and deposits with banks and interest paid to the other contracting state. The 10% rate applies in all other cases.

(dd) The 10% rate applies to government institutions. The 15% rate applies in all other cases.

(ee) The 0% rate applies to government institutions. The 5% rate applies in all other cases.

(ff) The 10% rate applies to government institutions.

(gg) The 0% rate applies to government institutions. The 10% rate applies in all other cases.

(hh) The 0% rate applies to government institutions. The 12% rate applies in all other cases.

(ii) The 0% rate applies to government institutions. The 8% rate applies in all other cases.

(jj) The 5% rate applies to banks. The 10% rate applies in all other cases.

(kk) The 0% rate applies to government institutions and interest paid on loans or credits for periods of no less than three years that are granted, guaranteed or insured by a financial or credit institution that is wholly governmentowned.

(ll) The 0% rate applies to government institutions. The 7.5% rate applies in all other cases.

(mm) The 5% rate applies to government institutions and interest paid on longterm loans (seven years or more) granted by banks or other credit institu tions that are resident in a contracting state.

(nn) The 0% rate applies to government institutions. The 10% rate applies to fi nancial institutions (including insurance companies). The 15% rate applies in all other cases.

(oo) The 0% rate applies to government institutions. The 5% rate applies to banks. The 12% rate applies in all other cases.

(pp) The 5% rate applies to royalties paid for the use of, or the right to use, in dustrial, commercial or scientific equipment, or transport vehicles. The 10% rate applies in all other cases.

(qq) The 5% rate applies to royalties paid for the use of, or the right to use, in dustrial, commercial or scientific equipment. The 10% rate applies in all other cases.

(rr) The 5% rate applies if the dividend is paid out of profits that have borne the normal rate of company tax and if the beneficial owner is a company that owns at least 10% of the shares. The higher rate applies to other divi dends.

(ss) The 5% rate applies to interest on loans from banks and insurance compa nies, bonds and securities traded on a recognized securities market and credit sales of machinery or equipment if the seller is the beneficial owner of the items. The 15% rate applies in all other cases.

South Africa is in the process of negotiating, finalizing, signing or ratifying new treaties, or protocols to existing treaties, with several jurisdictions, including Eswatini, Gabon, Germany, Kuwait, Luxembourg, Malawi, Mozambique, Netherlands, Senegal, Sudan, Switzerland and Zambia.