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South Africa Completes Dividend Tax Reform

by Robert Lee,, London

16 February 2009

South African Finance Minister Trevor Manuel announced as part of his 2009 budget speech on February 11 that the basic legislative framework for the introduction of the new dividend tax has been completed.

The legislation providing for the dividend tax, which replaces the secondary tax on companies (STC), was enacted in 2008, and will come into force once South Africa has ratified a number of renegotiated tax treaties. However, the government has still not fixed an implementation date for the new tax, and Manuel said that it is "likely" to come into force during the latter half of 2010.

Under the dividend tax regime, local individual taxpayers will be taxed at 10%; domestic retirement funds, public benefit organisations and domestic companies will be exempt; and foreign persons will be eligible for tax-treaty benefits (i.e. a potential reduction to a 5% rate).

The tax also provides for transitional credits, so that tax paid under the secondary tax on companies can be used to offset the dividend tax. The legislation also contains a mechanism under which the paying company (or paying intermediary) withholds the tax.

Further legislative amendments are expected during 2009, which, according to Manuel, will provide for the completion of the dividend tax reform. The remaining items mostly relate to anti-avoidance concerns (such as preventing companies from converting taxable sales to tax-free dividends) and to foreign dividends.

Other major announcements in the budget included: personal income tax relief worth ZAR13.6bn (USD1.35bn); a delay in the implementation of new mineral and petroleum royalties until March 1, 2010; incentives for investments in energy-efficient technologies; improved tax treatment for emissions credits; reform to vehicle excise duties; an increase in 'sin' taxes; an air passenger departure tax and a review of motor vehicle travel allowances. The main rates of income tax were left on hold.

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