South African resident companies (and individuals) are required to include in their gross income any amount received or accrued by way of a foreign dividend, as defined.
A “foreign dividend” is defined in section 1 of the Income Tax Act, 58 of 1962 (the “Act”) as including, inter alia, any amount that is paid or payable by a foreign company in respect of a share in that foreign company where that amount is treated as a dividend or similar payment by that foreign company for the purposes of the laws relating to -
- tax on income on companies of the country in which that foreign company has its place of effective management; or
- companies of the country in which that foreign company is incorporated, formed or established, where the country in which that foreign company has its place of effective management does not have any applicable laws relating to tax on income (subject to certain exclusions).
The South African income tax treatment of a foreign distribution will therefore be a function of the income tax treatment of that distribution in the foreign jurisdiction. In this regard it is therefore recommended that confirmation is obtained that dividends declared by a foreign company in question, are treated as dividends or similar payments in the relevant foreign jurisdiction, as set out above.
Foreign dividends, as defined are, however, exempt from tax in terms of section 10B of the Act in certain circumstances. Most notably, section 10B of the Act, provides for the so-called “participation exemption”.
In this regard section 10B(2)(a) of the Act provides that foreign dividends are exempt from tax where the person who received or accrued a foreign dividend holds (whether alone or together with any other person forming part of the same group of companies) at least 10% of the equity shares and voting rights in the company declaring the dividends, subject to certain exclusions.
Accordingly, in order to qualify for the participation exemption for foreign dividends a taxpayer has to establish certain requirements, inter alia:
- that the amount is payable by a foreign company in respect of a share;
- that the distribution made by the foreign company qualifies as a foreign dividend as defined (as set out above); and
- that the recipient of the foreign dividend holds at least 10% of the total equity shares and voting rights in the company declaring the foreign dividend.
In this regard it is noted that the Taxation Laws Amendment Bill, 39 of 2013 (“Bill”), contains a proposed amendment to the participation exemption which provides for a further limitation to the application of the participation exemption. In this regard it is proposed that the participation exemption will not apply to any foreign dividend received or accrued to a person if the foreign dividend is received or accrues in respect of a share, other than an equity share.
An “equity share” is defined in section 1 of the Act as any share in a company including any share that, neither as respects dividends nor as respects returns of capital, carries any right to participate beyond a specified amount in the distribution.
Accordingly, assuming the Bill will be promulgated in its current form, the participation exemption will no longer apply in respect of foreign dividends received or accrued in respect of a share other than an equity share, such as a preference share, despite the shareholder (whether alone or together with another company in the same group of companies) holding at least 10% of the equity shares and voting rights in the foreign company.
In terms of the Bill, the proposed amendment will come into operation on 1 April 2014 and will apply in respect of foreign dividends received or accrued on or after that date.