What is dividends tax and how does it affect South Africans living abroad? What are the dividends tax exemptions and how do they work? Here’s what expats need to know about the impact of dividends tax when filing their income tax returns with the South African Revenue Service (SARS).
What is dividends tax?
Dividends tax is the taxation of shareholders that takes place when they receive dividend payments. Typically, this tax will be deducted from the dividend amount by a withholding agent, which is either the company distributing the dividend or in cases involving a regulated intermediary, the intermediary itself.
A dividend is a payment from a company to its shareholders based on their ownership of shares, but does not include the return of money the company received for issuing shares. Dividend tax applies when dividends are paid by a South African tax resident company or a foreign company listed on a South African Exchange. However, dividend payments from headquarter companies are exempt from dividends tax.
Dividends tax was introduced in South Africa to replace secondary tax on companies (STC). This change was in line with international practices which places the tax burden on the dividend recipient, rather than the company distributing it. Previously, South Africa had a corporate-level tax on dividends (STC), which had a deterrent effect on international investment as a result of perceived higher corporate tax rates.
Under the new dividends tax system, some beneficial owners (shareholders) of dividends, both local and foreign, are exempt from dividends tax or enjoy a reduced rate, while dividends received under the STC system were fully taxed in the company declaring the dividend.
Who pays dividends tax?
In theory, dividends tax must be paid by the beneficial owner of the dividend, but in practice, it is withheld from the dividend payment and paid to SARS by a withholding agent. This is known as withholding tax on dividends in South Africa.
If the withholding agent fails to withhold the correct amount of tax, the individual responsible for the tax is still obligated to pay it. As always, every rule has its exceptions. When a dividend includes the distribution of a specific asset (in specie), the company itself becomes liable for the tax in a manner similar to STC. In such cases, the company is not required to withhold the tax from the dividend payment.
What is withholding tax on dividends in South Africa?
In general, dividends received by individuals from South African companies are exempt from income tax.
- However, the entities distributing the dividends must withhold dividends tax at a rate of 20% from payments made to individuals.
- For individuals receiving foreign dividends from foreign companies (with a shareholding of less than 10%), such dividends are subject to taxation at a maximum effective rate of 20% and no deductions are permitted for expenses incurred in generating foreign dividends.
How much is dividends tax?
Since 22 February 2017, the rate of Dividends Tax has risen from 15% to 20% for all dividends paid, regardless of the date of declaration. However, exemptions or reduced rates may still apply in certain cases.
Who is exempt from paying dividends tax?
- Local South African registered companies
- South African government entities, Public Benefit Organisations (non-profit companies) and mining rehabilitation trusts
- Pension, preservation, provident, and retirement annuity, funds
- Shareholders of registered microbusinesses (companies registered for Turnover Tax), provided the dividend is not more than R200,000 annually
- Non-residents receiving dividends from foreign companies listed on the Johannesburg Stock Exchange
- Natural persons who received a dividend on or after 1 March 2015 for a tax-free savings account.
- These entities have the potential to qualify for an exemption from dividend withholding tax if they fulfill the necessary form completion and timely submission to the dividend-paying company. However, if they fail to do so, they may still have the opportunity to reclaim the dividend tax from the company that distributed the dividend, as long as they complete the required forms within a three-year period following the dividend payment.
When is dividends tax paid?
Dividends Tax is applicable to any dividend declared and paid from 1 April 2012 onwards. The withholding agent, whether it is the company or a regulated intermediary, is responsible for paying the withheld tax to SARS by the last day of the month that follows the dividend payout. Along with the payment, both the DTR01 and the DTR02 returns must be submitted. Late payments of dividends tax or delayed submission of dividends tax returns may result in penalties and interest being imposed.
How does dividends tax affect your tax liability?
As a shareholder, whether in a South African resident company or a foreign company listed on a South African Exchange, you hold ultimate responsibility for dividends tax when you receive a dividend. However, the withholding agent, who handles the dividend payment, is obligated to withhold and submit the tax to SARS on your behalf.
If you wish to make use of any dividends tax exemption or request reduced rates under a Double Taxation Agreement (DTA) as a foreign resident, the withholding agent will furnish you with the necessary paperwork. You will need to submit the completed declaration and forms to the withholding agent before they can exempt the dividend payment or apply a reduced withholding rate.
Numerous withholding agents have streamlined their account-opening process to include the necessary declaration forms, so these no longer need to be submitted separately. If any significant details change, it is your responsibility as the beneficial owner to inform the withholding agent timeously.
FinGlobal: cross border tax specialists for South African expats
Managing tax compliance in two jurisdictions can get complicated and overwhelming. FinGlobal can assist. From tax clearance to tax refunds and advice on how to complete your tax emigration from South Africa, we can help ensure you’re always on the right side of the tax law.
To see how we can assist in streamlining your tax as a South African abroad, leave us your contact details and we’ll be in touch.