Companies are subject to income tax only on their income from South African sources excluding capital gains. Companies registered anywhere in the world are subject to tax on all income from actual and deemed South African sources. Income is regarded as being from a South African source if its originating cause is situated in South Africa. In addition, certain types of income are deemed to be from a South African source even if the true source is situated outside the country. In addition, companies pay the secondary tax on companies, which is imposed on all dividends declared by them. A once-only levy of 5% of taxable income has been imposed, which will be split between the 1995 and 1996 tax years. It will be 3,33% of taxable income in excess of R50 000 in the first of those years, and 1,67% in the second.

6.2.1. Rates

Companies are taxed on income at the rate of 35%. Gold-mining companies are taxed according to a special formula, at varying rates depending on the age and nature of the mine. Diamond mines and other non-gold mines are taxed at an effective rate of 35%.

6.2.2. Dividends Received

In most respects, a company is defined for tax purposes to include a close corporation. Dividends received by a company, a close corporation or a resident individual are exempt from tax, and are deducted from dividends paid by the company or close corporation in determining the net amount on which secondary tax on companies is calculated.

6.2.3. Determination of Taxable Income

The assessment is based on taxable income determined in accordance with the Income Tax Act. Taxable income normally coincides with profit calculated in accordance with generally accepted accounting practice. Capital receipts are excluded from gross income. To be eligible for deduction, expenditure must be incurred in the production of income, must be wholly and exclusively for the purposes of trade and must not be of a capital nature. A number of special allowances are taken into account in calculating taxable income.

6.2.4. Industrial Plant and Machinery

Industrial plant and machinery brought into use on or after 16 December 1989 qualifies for an annual write-off of 20% for a five-year period.

6.2.5. Industrial Buildings

Industrial buildings the erection of which was started by 31 December 1988 and which were brought into use by 31 December 1989 qualify for an initial allowance of 17.5% of their cost. An annual allowance of 2% is available on the balance of the cost after deduction of the initial allowance. Industrial buildings the erection of which began on or after 1 January 1989 qualify only for an annual allowance of 5% of cost.

6.2.6. Housing Projects

Housing projects consisting of five or more residential units qualify for a 10% initial allowance and a 2% annual allowance, provided that the units are for the use of employees or are to be let at a profit.

6.2.7. General Capital Allowances

Capital allowances are also available for expenditure on scientific research, patent rights, trademarks, know-how, hotels, aircraft and ships, and for agricultural capital expenditure (including dams, roads, fences and machinery) and mining capital expenditure.

6.2.8. Special Deductions

Where a tenant of property is obliged in terms of the lease to construct buildings or make improvements to existing buildings, it is entitled to tax deductions on the amounts it must spend.

6.2.9. Tax Losses and Group Relief

Companies in a group may not share their tax losses with profitable companies in the same group. Tax losses may not be carried back but may be carried forward indefinitely, provided that there is trading in every tax year.

6.2.10. Secondary Tax on Companies (STC)

The secondary tax on companies is a tax on dividends declared by a company (or a distribution declared by a close corporation). The tax liability is based on the net amount calculated by subtracting dividends accruing to the company from those declared by it. That net amount is taxed at the rate of 12,5% (for dividends declared after 14 March 1996), and the tax is borne and paid by the company. Dividends paid by distributing capitalization shares do not give rise to STC liability. Where a foreign company has a branch in South Africa, the company and its branch operation will for tax years ending on or after 1 April 1996 be exempt from the STC.

6.2.11. Branch Profits tax

As foreign companies with branches in South Africa will now be exempt from the STC, the South African sourced taxable income of the branch will be taxed at the rate of 40% for tax years ending on or after 1 April 1996.

For further information please contact: 

Werksmans Attorneys 

Werksmans Chambers, 22 Girton Road, Parktown, Johannesburg 2193 
or
P.O. Box 927, Johannesburg 2000 South Africa

Enquiries:        Mr Charles Butler
Telephone         27 (011) 488-0000
Telefax           27 (011) 484-3100/3200
E-Mail Address    cbutler@werksmans.co.za