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SARS Issues Foreign Dividend Taxation Guide

by Lorys Charalambous, Tax-News.com, Cyprus

15 February 2016


The South African Revenue Service (SARS) has issued a draft interpretation note to provide guidance on the interpretation and application of various provisions of the country's Income Tax Act relating to foreign dividends.

The note discusses the current gross income inclusion, exemptions, and other provisions applicable to foreign dividends, but does not deal with the income tax consequence of dividends paid by corporate headquarters, since this is addressed in the interpretation note issued on February 12, 2015.

With effect from January 1, 2011, a definition of "foreign dividend" was introduced into the Act. Combined with the insertion of the definition of "foreign company," and changes to the definition of "dividend," foreign dividends no longer fall within the definition of "dividend" on or after that date.

It is confirmed that a dividend and a foreign dividend are therefore mutually exclusive. A dividend relates solely to certain amounts transferred or applied by a resident company. A foreign dividend relates solely to certain amounts paid or payable by a foreign company, which by definition is a non-resident.

It is pointed out that any amount received by or accrued to a person as a foreign dividend is generally included in that person's gross income. Specific exemptions to that rule include foreign dividends received from a foreign company in respect of shares listed on the Johannesburg Stock Exchange (which are potentially already subject to South African dividends tax).

The Act also provides for a partial exemption of foreign dividends received which do not qualify for any specific exemption. The purpose of the partial exemption is to reduce the maximum effective normal tax rate on a taxable foreign dividend to 15 percent, which equals the maximum dividends tax rate.

Finally, as foreign dividends received by a person constitute income from a foreign source under the Act, foreign tax paid on those dividends potentially qualifies for a tax rebate.

TAGS: South Africa | tax | revenue guidance | tax authority | corporate headquarters | tax breaks | dividends | individual income tax | Africa | Tax

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