The South African corporate tax rate remains unchanged at 28%. The increase in the dividends tax upon distribution of company profits to 20% may however impact on business structures that rely heavily on dividend flows. Business tax related aspects that the National Treasury will review during the 2017 legislative cycle include a number of measures planned to strengthen anti-avoidance rules but also some relief for legitimate transactions currently adversely impacted by tax.

The South African National Treasury published its Budget Review for 2017 on 22 February 2017. This article provides a high level overview of some of the proposals that may impact business activities.

Tax rate related changes

The tax rate that applies to the profits of companies, in which most business activities are conducted, remained unchanged at 28%. The rate of dividends tax that applies to the distribution of the after-tax profits of a company however increased from 15% to 20% from 22 February 2017 onwards. As a result the effective tax rate applicable to company profits once it reaches the hands of shareholders is 42,4%.

The increase in dividends tax rate will affect certain business structures, for example, some Black Economic Empowerment (BEE) arrangements, that rely heavily on a stream of dividends tax service debts. There are some company shareholding structures that may not be affected by this rate increase: dividends paid by one South African company to another does not attract dividends tax. Double tax treaties may limit the dividends tax rate applicable to foreign shareholders.

Other business related proposals

It was announced that South Africa would be a signatory to a multilateral instrument that will incorporate certain measures aimed at preventing base erosion and profit shifting into existing tax treaties. The provisions of this instrument affect hybrid instruments and entities, resolution of dual residence conflicts, structures that involve instances of potential treaty shopping as well as arrangements to artificially avoid establishment of permanent establishments, all of which may impact cross-border business structures. Signing of the instrument is expected to take place in June 2017.

The 2017 Budget Review contains an indication of aspects that the National Treasury intends to review and introduce into the legislation during the 2017 legislative cycle. It is important to note that unlike the rate changes that have already taken effect, these aspects are merely an indication of where amendments can be expected in future. The following aspects are likely to be of particular relevance to business activities:

  • Widening and refinement of the qualifying purpose exemptions from the third-party backed share and hybrid equity instrument rules. This would impact whether the dividends on such an instrument are considered taxable.
  • The interaction between the tax imposed on shares that vest in employees (s 8C) and capital gains tax will be clarified. This is of particular relevance where employers use share incentive trusts to house shares until vesting.
  • Efforts to curb excessive debt financing that may cause base erosion will be reviewed in light o f t h e OECD re c omme nda t i o n s . T h e deductibility of interest incurred by businesses could be affected by this.
  • A number of aspects of the rules relating to debt forgiveness will be reviewed. This includes certain provisions that provide relief when debts owing by dormant group companies or companies under business rescue are waived. Debt to equity conversions may also in future fall outside the debt reduction rules.
  • Countermeasures are planned to curb arrangements involving share buy-backs and subscriptions where such arrangements aim to avoid CGT on the disposal of shares.

Pieter van der Zwan, the author of this article, presents a monthly tax webinar with 2020 South Africa and the IAC.
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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.