Understanding withholding tax in South Africa: A guide for non-residents

There are many different names, classifications and categories for tax – but they all boil down to the same basic principle: you’ve earned some money; acquired or disposed of a valuable asset in South Africa and the South African Revenue Service (SARS) wants their cut. South Africa has a residence-based tax system, which means that tax residents are taxed on both their worldwide and locally-sourced income, while non-residents are taxed on income that is sourced in South Africa.

Withholding tax in South Africa usually comes into play with non-residents. Let’s take a look at what it means, and what types of incomes and transactions attract withholding tax.

What is non-resident withholding tax in South Africa?

In plain terms, where a non-resident earns an income, makes a capital gain on the disposal of an asset located in South Africa or is paid for a service from a South African source, that South African payer is, in certain circumstances, obliged to withhold a portion of that money as tax on behalf of the SARS.

While the non-resident individual is liable for the tax, the person paying the non-resident must withhold the tax portion from their payment, just to ensure there is no opportunity for the non-resident to commit tax evasion.

When does withholding tax usually affect non-residents?

For South African expat non-residents who sell their immovable property for more than R2 million, under certain circumstances they have a withholdings tax duty to SARS, according to the section 35A of the Income Tax Act.

Disposal of immovable property by non-residents: how is withholding tax calculated?

Withholding tax is basically a mechanism that SARS has put in place to make sure that Capital Gains Tax liability on the disposal of an immovable asset by a non-resident is not bypassed in any way.

A person who pays an amount in to a non-resident in pursuit of the sale of an immovable property located in South Africa must withhold from the gross selling price a portion of tax to the value of:

• 7.5% of the sale amount of if the non-resident seller is an individual
• 10% of the sale amount if the non-resident seller is a company, or
• 15% of the sale amount if the non-resident seller is a trust.

Some things to point out about non-resident withholding tax in respect of property sales:

• This withheld amount is not the final tax for the non-resident seller.
• This is considered an advance payment of the non-resident tax liability on the disposal of that property during the tax year of assessment in which the property was sold.
• As such, the non-resident seller must still submit an income tax return for that tax period.
• The conveyancer must hold back the relevant amount in the conveyancing firm’s trust account, before paying over to the seller the balance of the net sale proceeds.
• Payment of the withholding tax must be made to SARS within 21 business days from the date that the property transfer took effect.

Withholding tax exemptions:

First, no withholding tax applies if the property is sold for below R2 million. Beyond this threshold it is important for non-resident sellers to understand the implications of section 35A of the Income Tax Act and the withholding tax requirements.

• They should be aware that they have the option to request a Directive from SARS to have the transaction exempted from withholding tax, or to have the rate of withholding tax payable reduced.
• This can be done by submitting the necessary application form and supporting documents to SARS, or by granting Power of Attorney to their tax advisor or the conveyancer to submit the necessary documents on their behalf.

The reasons why a sale might be eligible to qualify for a lower rate of withholding tax will depend on the facts of the particular case, such as:

• The seller being fully exempt from income tax or
• Having a low taxable income
• Having sold the property for a capital loss

Until the directive has been finalised, the conveyancing attorney has a duty to keep the withholding tax funds in trust. As such, it is important for sellers to apply for a Directive at the commencement of the transaction to allow sufficient time for the Directive to be issued before transfer registration takes place.

How to request a Tax Directive for sale of property and how long does it take for SARS to process?

To request a tax directive for a lower or zero rate of withholding tax, the non-resident seller must complete form NR03 and submit it together with the offer to purchase, tax calculation and supporting documentation to SARS.

The directive application is generally processed within 21 business days, but this can vary depending on whether they require additional information or documentation.

• Non-resident sellers need to be aware that a portion of their net sale proceeds may be withheld once their transfer registers and that their expected net proceeds may be less than they had anticipated.
• It is therefore important for transferring attorneys to communicate the provisions of section 35A to non-resident sellers as soon as possible and for sellers to inform their transferring attorneys if they have immigrated, and no longer meet the requirements of tax residency in South Africa.

By understanding the requirements of section 35A and the options available, non-resident sellers can manage their cash flow and ensure that they receive the expected profit from their property sale.

What are some other types of withholding tax that affect non-residents in South Africa?

Withholding tax on South African dividends:
When a company in South Africa pays dividends to someone who is a non tax resident of South Africa, a tax of 20% is taken from the payment. This applies to both South African companies paying non-residents and non-South African companies paying non-residents, as long as the shares are listed on a South African exchange. The tax is taken from the person receiving the dividend, not the company, except in the case of in specie dividends. The company or intermediary paying the dividend is responsible for deducting the 20% tax from the payment.

Withholding tax on royalties payable to non-residents:
When a non-resident receives payments for the use of intellectual property rights in South Africa, such as royalties or know-how payments, the payment is considered to come from South Africa. The person making the payment must withhold a 15% tax from the payment, which is the final tax paid by the recipient of the income.

Withholding tax on interest payable to non-residents:
A 15% withholding tax applies to interest payable from a South African source to non-residents on certain debt instruments. The resident payer of the interest is required to deduct the 15% withholding tax from the payment.

Service fees payable to non-residents:
No domestic withholding tax is levied on fees payable to non-residents.

FinGlobal: tax specialists for South African expats

If you’re a South African non-resident expat, tax shouldn’t be complicated or stressful. Let FinGlobal take care of all your tax requirements, including all the headaches of dealing with SARS – whether it’s withholding tax for non-residents or tax clearance for foreign investment allowance purposes, we can handle all the paperwork and eliminate the worry for you.

To see how easy and hassle-free our service can be, leave us your contact details and we’ll be in touch to discuss your specific tax-related requirements.