In today’s economy, few can survive on a single income stream. As such, most South Africans have a side hustle or two, from which they may receive some sort of foreign income, whether this is in the form of dividends, employment income, rental income, interest, or royalties. With this in mind, it’s important to clarify whether income from foreign sources is subject to taxation in South Africa and also to ascertain whether such foreign dividend income needs to be declared in your South African tax return. In short, the answer is yes. Foreign dividends income is as a rule taxable in South Africa, for as long as you remain a South African tax resident as it is worldwide income.
The world wide basis of taxation: resident vs non-resident tax in South Africa
The South African tax system is operated by the South African Revenue Service (SARS) on the principle of the world wide basis of taxation. This means that if you are a South African resident for tax purposes, you are liable to be taxed on all income, local and foreign, no matter where it is earned or sourced. If you meet the requirements of tax residency, it is highly likely that you will have to pay income tax in South Africa. Once you become a non-resident for tax purposes (through ceasing your tax residency by tax emigration through SARS), you will only need to declare and pay tax on locally-sourced income in South Africa.
Are there any tax exemptions in South Africa for foreign dividends?
Section 10B(2) of the South African Income Tax Act allows tax exemption on some foreign dividends received by residents. To qualify, it is necessary to meet specific conditions. These include: having at least 10% equity or voting rights in the foreign company, the foreign company being a controlled foreign company (CFC) where the resident has more than 50% rights, or the foreign company being in a country with a tax treaty exempting foreign dividends.
You must show that you meet the conditions for exemption by providing, for example, share certificates, the foreign company’s annual report, or the tax treaty. It’s essential to remember that this exemption isn’t always guaranteed and may not apply in certain cases, such as when the foreign dividends come from what SARS deems to be a “passive investment”.
Section 10B(3) of the Income Tax Act offers a partial exemption for foreign dividends when the full exemption in Section 10B(2) doesn’t apply.
Here’s how it works: 25% of the foreign dividend is tax-free, while the remaining 75% is taxable. This partial exemption is available for foreign dividends from any foreign company, whether or not the resident has a share in it.
To qualify, you must show proof of receiving the foreign dividend, such as a bank statement or a tax certificate from the foreign country. However, this partial exemption has limits, and it doesn’t cover foreign dividends from what SARS considers “passive investments.”
Taxation of foreign dividends for individuals
For individuals, foreign dividends received from foreign companies (where shareholding is less than 10% in the foreign company) are taxable at a maximum effective rate of 20% in South Africa. It’s important to note that no tax deductions will be granted for expenditure involved in the generation of foreign dividends.
As with every rule, there are exceptions:
- Dividends from controlled foreign companies (CFCs): Dividends received from a CFC are generally fully taxable in South Africa, regardless of the shareholder’s residency.
- Dividends from foreign companies with a permanent establishment in South Africa: Dividends received from foreign companies permanently established in South Africa are generally taxable by SARS to the extent that they are attributable to the profits of the permanent establishment.
- Dividends from foreign companies listed on a South African Exchange: Dividends received from foreign companies listed on a South African exchange are typically subject to a 20% dividend withholding tax. However, this withholding tax can be reduced or eliminated under a double taxation treaty between South Africa and the country where the foreign company is resident.
Taxation of foreign dividends received by companies
Much like individuals, South African resident companies are typically taxed on their worldwide income, which includes foreign dividends. However, there are some exceptions to this rule:
- Dividends from qualifying foreign subsidiaries: Dividends received from a qualifying foreign subsidiary can be exempt from tax in South Africa. Such a qualifying foreign subsidiary is a foreign company in which the South African resident company holds at least 10% of the equity shares and voting rights.
- Dividends from foreign companies with a permanent establishment in South Africa: Similar to individuals, dividends received from foreign companies with a permanent footprint in the Republic are generally taxable in South Africa to the extent that they are attributable to the profits of the permanent establishment.
Tax credits for double taxation on foreign dividend income
South African resident taxpayers who pay foreign tax on their foreign dividends may be eligible for a tax credit in South Africa. This tax credit is designed to prevent double taxation of foreign income, ensuring that you are not taxed twice on the same income in both South Africa and the foreign country.
Declaring foreign dividend income on your tax return
South African taxpayers who receive foreign dividends are required to report this income on their annual income tax return, along with any foreign taxes paid on the foreign dividends. Declaring all of your worldwide income in your tax return is important to avoid penalties and ensure you are taxed correctly.
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The taxation of foreign dividends in South Africa can get complicated, depending on factors such as shareholding percentages and the presence of permanent establishments. To keep on the right side of tax law, it’s advisable to stay informed and meet your tax obligations to avoid any legal and financial penalties associated with non-compliance with foreign income tax requirements in South Africa.
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