Dividends tax: what you need to know

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THE Secondary Tax on Companies (STC) will be replaced with the new dividends tax, with effect from April 1. This move aims to bring South Africa in line with international best practice and to help eliminate the double-taxation perception of the South African tax system, where the secondary tax is levied on shareholders and not on the company.

Another reason for the change is that STC is not recognised as a tax levied on the resident of another country for treaty purposes. This means that a South African company paying dividends to a non-resident investor would not be able to reduce the rate of STC in respect of a dividend paid to a resident of a treaty country.

The onus will be on shareholders to inform companies paying dividends that they are exempt from dividends tax. Similarly, a non-resident shareholder would have to inform a company that they live in a treaty country, and qualify for a reduced rate of tax in respect of the dividend.

This will create an additional administrative burden for companies, as they will have to ensure that these records are in place before the first dividend is declared under the new legislation. If the company does not have a declaration and undertaking from a shareholder, the company will be obliged to deduct the 10% withholding tax on payment of the dividend. Shareholders may already have received letters from companies requesting information regarding their exempt status.

Dividend tax is levied at 10% of the amount of any dividend paid by a local company. The trigger now is payment of the dividend, not its declaration. Exemptions apply to dividends paid to exempt “beneficial owners”, among them South African resident companies, any sphere of the South African government and approved public-benefit organisations.

With the new dividend tax, companies will be expected to deduct the tax from the dividends paid to shareholders and to pay it over to the South African Revenue Services (SARS). This is convenient for SARS as it will be similar to how the Pay As You Earn system works whereby companies collect employee taxes on SARS’s behalf.

Muneer Hassan is project director of tax at the South African Institute of Chartered Accountants.

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