Analysing tax exemption for dividends

Dividends are a valuable part of many shareholders’ income, but even though they are exempt from regular income tax, it does not mean that they are completely exempt from tax.

A dividend can be defined as any local or foreign dividend paid by a resident company of South Africa or a foreign country, provided that the foreign dividend is paid as a listed share and to the extent that the foreign dividend does not consist of an asset in specie. Dividends that South African tax residents receive are generally exempt from income tax. However, the mere fact that these dividends are exempt from income tax does not necessarily mean that they are not subject to tax.

Dividends tax is imposed at a rate of 20% on all dividends that are declared and paid. The beneficial owner of a dividend, typically the shareholder, is liable for dividends tax in most cases. However, should the dividend in question consist of an asset in specie, the liability falls on the company paying the dividend and not on the beneficial owner. There are instances in which dividends tax will not be levied, specifically where the beneficial owner of the dividend is either a South African resident company, a South African retirement fund, or any other prescribed exempt person.

Dividends tax operates as a withholding tax. The company that declares the taxable dividend must withhold and pay an amount directly over to SARS on behalf of the recipient taxpayer. Where a regulated intermediary pays a dividend, it is responsible for withholding the applicable dividends tax. The Income Tax Act, No. 58 of 1962 (the Act) caters for several instances in which a dividend declaring company is freed from the obligation to withhold dividends tax.

The dividend declaring company would not have to withhold the dividends tax from the payment of a dividend provided that the dividends are declared to identified persons. These instances include the following:

• Where the person to whom the payment is made has, before the dividend payment, submitted to the dividend declaring company in the prescribed form that the dividend is exempt from dividends tax in terms of section 64F of the Act;
• A written undertaking by the beneficial owner in the prescribed form in which the declaring company is informed that the beneficial owner changed or the circumstances affecting the exemption applicable to the beneficial owner changed;
• Where the beneficial owner forms part of the same group of companies as the dividend declaring company; and
• Where the payment is made to an intermediary.

Irrespective of the instances in which a dividend declaring company is freed from the obligation to withhold dividends tax, it is important to note that withholding tax is more likely than not to be reduced should a double taxation agreement find application.

If you want to find out more about dividends tax and how it may affect you, do not hesitate to contact one of our expert advisers for further assistance.

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)