Currently South Africa does not impose a withholding tax in respect of interest paid to any offshore investors. However as from 1 July 2013, the Income Tax Act (58 of 1962) will impose a new withholding tax on interest paid by a resident person to or for the benefit of any foreign person. For withholding tax purposes a ‘foreign person’ is defined as any person that is not a resident of South Africa from an income tax perspective. A foreign person will be liable for withholding tax to the extent that the interest has been received or accrued from a South African source, however the resident payor will have the obligation to withhold the tax from the interest payment.
The legislation grants certain exemptions from the withholding tax on interest. Specifically exempt is interest that is paid to foreign persons by the South African government, any bank, the South African Reserve Bank, Development Bank of Southern Africa, Industrial Development Corporation or a headquarter company. An exemption is also granted in respect of listed debt, bills of exchange or letters of credit for interest incurred on the purchase price of goods imported into South Africa, interest payable by a regulated intermediary or in respect of a collective investment scheme. Interest generated by a permanent establishment of a foreign person that is situated in South Africa for a 12 month period preceding the date on which the interest is paid will also be exempt from the withholding tax.
As an anti-avoidance measure, interest paid to a foreign person will not be exempt from the withholding tax if that foreign person advanced an amount to a bank and that bank subsequently lends the amount to a person who is a related party to that foreign person. The bank advances the amount to that related party based on the amount advanced by the foreign person.
Generally the withholding tax rate on interest will be imposed at 15 per cent. A resident payor will not be obliged to withhold tax to the extent that the foreign person has submitted a declaration by the date of payment advising that it is either exempt or is subject to tax at a reduced rate in terms of the provisions of a double taxation agreement (“DTA”). South Africa has concluded a number of DTA’s in various jurisdictions. We have set out below a table in respect of certain jurisdictions that we have considered and have indicated the taxing rights that arise in respect of interest generated from South Africa. The below listed DTA’s provide that interest attributable to a permanent establishment of a foreign person that is situated in South Africa will not qualify for a reduced rate.
Click here to view table.