South Africa: Residence Based Taxation System

Last Updated: 8 December 2000
Article by Peter Surtees

South Africa has always used a source-based taxation system, although the numerous deeming provisions mean that in effect the system is a hybrid of source and residence base. Earlier this year the Minister of Finance announced his intention to move to a fully residence-based system, the first step of which was the introduction of tax on foreign dividends with effect from 23 February 2000.

Foreign dividends accruing to residents have formed part of their gross income since that date, unless they emanate from one of a list of 27 "designated" countries (see below) and the shareholding of the resident in the company paying the dividend exceeds 10%. If the income of the paying company is itself taxable in the Republic, provisions are in place to ensure that double tax does not occur. Any foreign taxes paid on the dividend will be allowed as a credit, up to the amount of the South African tax on the dividend.

The Revenue Laws Amendment Act passed recently by Parliament constitutes the next step in the process. Effective from 1 January 2001, its effect will be that residents will be taxed on their worldwide income, while non-residents will be taxed on their income from South African sources, subject of course to the many DTAs South Africa has with other countries. The change has necessitated a definition of "resident", which has not been required before.

For natural persons, two tests apply:

  • the ordinary residence test;
  • the physical presence test.

A person who is ordinarily resident is deemed to be a resident for tax purposes regardless of whether or not he or she was actually resident in the Republic at all during the year. The meaning of "ordinary residence" has been extensively considered by the courts, and the most succinct summary of its meaning is that it is the location of the principal or permanent home of the person, "the country to which he would naturally and as a matter of course return after his wanderings".

If the person is not ordinarily resident, the physical test must then be applied. In contrast with the subjective test for ordinary residence, physical residence is objective, being entirely numerical. The person must be physically in South Africa for more than 91 days in the current year AND each of the preceding three years AND must have been physically present for a period or periods exceeding 549 days in aggregate during those preceding three years.

Then if the person, having become a resident under this paragraph, is outside the Republic for at least 330 days, he will retrospectively be deemed not to have been a resident from the date of departure.

Expatriates in South Africa
Employees seconded to RSA for periods of less than 4 years will, in terms of the provisions set out above, not be deemed to be residents. They will, however, be taxed on their RSA earnings in terms of the source rules, which remain in operation.

If an expatriate moves assets and family to RSA and buys fixed property here, he is likely to be deemed ordinarily resident in terms of the definition supported by the general rules.

An emigrant who was formerly ordinarily resident will have to take care during the first year or so after leaving the Republic.

He cannot be deemed to be resident during the year of departure ("E"), because the first requirement of the definition of "resident" is that he not be ordinarily resident at any time during the year. Presumably he will be taxed as ordinarily resident until the date of departure. For the rest of E he will be neither ordinarily resident nor resident.

In the first full year after emigration ("E+1"), the time rule applies. If he had emigrated later than 91 days into the year, and had satisfied the 91-day rule in each of E-1 and E-2, he would have to ensure that he did not return to the Republic for more than 91 days in E+1. If he did return for more than 91 days in E+1, he would be deemed to be a resident for that year.

Other Entities
For entities other than individuals, the criteria for being deemed to be a resident are whether the entity is incorporated OR was established OR formed in the Republic, OR whether it has its place of effective management here. This is wide range of tests, and effectively overrides the well-established legal principles in terms of which a crucial test was where the entity carried on its activities. So, for example, a company registered in South Africa but which operates a mine in Zimbabwe would be taxable in South Africa on its profits.

An interesting exemption from the definition of resident is a new concept, the "international headquarter company (IHC)". This new entity has been introduced into the Act by means of a definition. An IHC is a company the entire equity share capital of which is held by persons who are not residents or trusts. Two further conditions are:

  • that any indirect interest of residents or trusts does not exceed 5% of the equity; and
  • that 90% of the value of the assets of the company represents interests in the equity and loan capital of non-resident subsidiaries. (One assumes that the intention is that at least 90% of the equity must be so held, and not exactly 90% as the Act reads).

Because the new definition of "resident" excludes any IHC, these will enjoy three attractive benefits as compared with resident companies:

  • they will not be taxed on foreign dividend income;
  • they will not be taxed on their proportion of the net income of their controlled foreign entities;
  • they will not be liable for the Secondary Tax on Dividends (STC) in respect of dividends declared by them.
  • Predictably, relief is provided in respect of foreign taxes payable in respect of income taxed as set out above. This will be discussed in more detail later in this article.


The Act provides for several exceptions:

  • residents earning income from foreign employment will not be taxed on their earnings, provided they are outside the country for at least 183 days during any 12 month period of which at least 60 days are continuous;
  • pensions received from foreign sources in respect of services rendered offshore will not be taxed, at least not for the next three years or so. If this concession is changed in the future, which by no means certain, it is hoped that social pensions at least will enjoy permanent exemption;
  • the income of any resident company from a foreign branch will be exempt provided it is taxed in a "designated" country at a rate of at least 27% (90% of the South African corporate rate). The list of 32 designated countries, set out below, includes most of South Africa’s main trading partners. Absentees are tax havens such as Cyprus and Malta, and countries that use low tax rates to attract investment, such as Ireland, Mauritius, India and Botswana;
  • the income of any controlled foreign entity, provided it is a business establishment as defined. The definition is based on the OECD definition of "permanent establishment";
  • where the funds may not be remitted to South Africa on account of exchange control limitations in the country of origin, for so long as the limitations apply.

Designated Countries
Algeria, Australia, Austria, Belgium, Canada, Croatia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Israel, Italy, Japan, Republic of Korea, Lesotho, Malawi, Namibia, Netherlands, Norway, Poland, Romania, Slovakia, Swaziland, Sweden, Thailand, Tunisia, United Kingdom, United States of America, Zambia, Zimbabwe.

Controlled Foreign Entities (CFEs)
Only the passive income of CFEs is imputed to the controlling entity in terms of the present legislation. This is now being extended to include active income, subject to certain exceptions in respect of the active income (in other words, passive income will continue to be imputed):

  • where the controlling entity has an interest of less than 10%;
  • where the CFE is situated in a designated country;
  • where the income of the CFE is taxed at a rate of at least 27%; or
  • where the CFE is a business establishment.

The Act contains an anti-avoidance provision to counter what are described as "diversionary transactions" aimed at exploiting the South African tax base. An example common to South African businesses would be the interposition of a Mauritian company between a manufacturing company in the Republic and its offshore customers. The sale of goods via the Mauritian company, with a small markup from South Africa to Mauritius and a substantial one from there to the customers would be seen as a diversionary transaction. The net income of the Mauritian company would be imputed to the South African company.

Foreign Dividends
Foreign dividends are already taxable in the hands of residents. However, if such dividends emanate from companies whose profits have been imputed to South African residents under the new provisions, the dividends will not be taxed again.

Tax Sparing
In respect of foreign dividend income there is now a significant concession, following representations by the business community. The Minister may waive the application of section 9E to such extent as he may deem "necessary in the national interest" in respect of any project and subject to such conditions as he may prescribe. In making such a decision, he will have regard to:

  • the economic benefits for the Republic; the extent to which goods and services for the project will emanate from the Republic;
  • the potential effect on the tax base; any other state assistance granted to the project;
  • any other criteria he may prescribe.

The practical effect of such a concession is that the taxpayer will be able to repatriate the benefits of the tax incentives enjoyed in the foreign country. Previously such benefits would have been lost when the dividends were brought onshore.

Foreign Currency Adjustment
Where foreign income accrues to a resident, it must be determined in the relevant currency and then converted into Rands at the rate ruling on the last day of the year of assessment.

The section dealing with royalties payable to non-residents has for many years provided for the deduction of a provisional tax of 12% of the amount. The effect of this was that the recipient had to register as a taxpayer and was subject to tax on 30% of the amount. The 12% deducted would then be set off against the tax owing. This untidy situation has been deleted and replaced with a simple withholding tax of 12% of the amount of any such royalty, deductible by the person paying the royalty.

Relief In Respect Of Foreign Taxes Paid
Having subjected to tax the various categories of income from foreign sources accruing to a resident, the Act then provides for relief in respect of any foreign taxes paid on such income. In general, all foreign taxes payable on income from foreign sources may be set off against South African tax on such income to the extent of the South African tax payable, with any surplus being carried forward for a maximum of seven years. In respect of foreign dividends, these will be rebated to the extent that the income from which they have been paid has been included in income under the imputing provisions.

The conversion rate is the rate applicable on the date the foreign tax is paid; if it is unpaid at the end of the year, the year end rate; in the case of foreign dividends, the same rate as that used to convert the dividends.

The foreign income is aggregated, as are the foreign taxes. Only if the total taxes paid exceed the total income is the balance carried forward to the next year as if it were an assessed loss.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.