Shareholder Dividends Tax

2008-03-12 00:00

In the 2007 and 2008 Budget Reviews, significant proposals were made concerning the conversion of secondary tax on companies (STC) to shareholder dividends tax (SDT).

The fiscus has indicated that the STC liability adversely impacts the income statement of a South African company as the company distributing the dividend must subtract the STC charge from its profits.

Other factors that have led to the imminent demise of STC have been the unfamiliar mechanism for foreign investors as well as arguments from the private sector that STC raises the cost of equity financing.

SA Revenue Service (SARS) announced on February 20 that the proposed conversion would occur in two phases. In the first, STC was reduced from 12,5% to 10% from October 1, 2007.

The fiscus has also identified the common loopholes associated with STC and provided amendments to close them.

Further amendments to the STC regime are expected during the 2008/9 Budget year.

The second phase will witness the conversion of STC to SDT. The second phase is due for completiton in 2000, depending on the amendment of various international tax treaties that limit withholding tax on dividends to zero percent.

It appears that most of the treaties have been re-negotiated and await signatures and Parliamentary approval.

The proposed system entails the taxing of distributed profits at the current STC rate of 10%. The burden of tax will shift from the company to the shareholder.

It is proposed that SDT will be a separate final withholding tax and dividends will not form part of the shareholder’s income.

As with the STC regime, SDT will also apply to distributions during the operating life of the company as well as in liquidation.

Non-corporate and non-resident shareholders will generally be subject to tax at a rate of 10% on the full dividend received.

The following exemptions/deferrals are proposed:

o Distributions to exempt entities — public benefit organisations will be exempt from SDT; however, recreational clubs will be taxed on their dividends as clubs are exempt from income tax only on investment income up to a monetary limit.

o Treaty relief — the dividend tax rate for non-resident shareholders may be limited if an international tax treaty exists between South Africa and the shareholder’s country of residence. However, in certain situations, a five percent limit may apply.

o Intra-company dividends — as a rule of thumb, underlying company profits should be subject to only one level of tax distribution. All inter-company dividends between resident companies are exempt, with the tax applying only at the level where dividends are declared. The new regime will alleviate the need to track STC credits.

It appears that the company declaring the dividend will be required to withhold the tax upon declaration and pay it to SARS on or before the end of the month following the month in which the dividend was declared.

This principle is in line with the current STC legislation.

As indicated previously, there is no need for credits as the proposed tax will apply only at the top level of the company.

There are two fundamental differences: first, in terms of STC the tax liability falls on the company whereas the tax falls on the shareholder under the proposed regime. Second, STC is based on the amount of dividends declared whereas the proposed regime will be based on dividends receivable.

It must be noted that any STC credits that have accumulated before the implementation of the proposed regime will be forfeited.

The fiscus have stated that as a result of the delay in the timing of the amendment, taxpayers can still utilise the STC credits in the interim.

There are various other issues that have been presented in the media release.

It will be in the best interest of the public to provide as much feedback as possible to enable a relatively smooth transition to the proposed regime.

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