Amendments to the Income Tax Act that came into effect on January 1 2015 have had an impact on franchise agreements. Section 49B has increased the rate of withholding tax on royalties which are payable to or for the benefit of a foreign person. Thus, a franchisee who is a South African resident must now withhold tax at a rate of 15% (previously 13%) in respect of royalty payments to a non-resident franchisor.
In terms of the amendment, provision is still made for reduction of the withholding tax rates in accordance with double tax agreements.
Section 49D contains an exemption from this withholding tax, which applies if:
- the foreign person is a natural person who is physically present in South Africa for more than 183 days during the 12-month period in which the royalty is paid;
- the property in respect of which the royalty is paid is effectively connected with a permanent establishment of that foreign person in South Africa; and
- the foreign person is already a registered taxpayer in terms of the act.
It also applies where the royalty is paid by a headquarter company (which is defined by the act) in respect of licensing intellectual property to a foreign company, where the headquarter company holds at least 10% of the equity shares or voting rights in the foreign company to which it pays the royalties.
Section 49F has also been amended, with effect from January 1 2015, to read that if the tax has not been paid by another person and a foreign person is liable for any amount of withholding tax on royalties in respect of any amount of royalties paid to or for the benefit of the foreign person, that foreign person must pay that amount of withholding tax by the last day of the month following that in which the royalty is paid. In terms of the amended Section 49F(2), any person that withholds the tax must submit a return and pay the tax to the commissioner by the last day of the month following that in which the royalty was paid.
For further information on this topic please contact Lawrence Helman at ENSafrica by telephone (+27 21 410 2500) or email (firstname.lastname@example.org). The ENSafrica website can be accessed at www.ENSafrica.com.
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