The distribution of dividends from South African companies to its shareholders has tax consequences and various resolutions and forms need to be completed in order to ensure that you do not fall short of the obligations of the Companies Act or the Income Tax Act.
The payment of dividends tax is triggered by the payment of a dividend by any South African tax resident company or a foreign company whose shares are listed on the JSE.
On the 1st of April 2012, Secondary Tax on Companies (STC) was replaced with Dividend Withholding Tax (DWT).
How is DWT different from STC?
There were two major changes with the introduction of DWT.
The first difference lies in the fact that DWT is a tax levied on shareholders (beneficial owners of dividends) when they receive dividends, whereas STC is a tax levied on companies on the declaration of dividends. This change in dividends tax could enable some of the foreign shareholders to obtain tax credits in terms of the Double Taxation agreement between South Africa and the relevant foreign country.
The second major change is in the fact that DWT is charged at 15% of the distribution, whereas STC was charged at 10%.
Are there any exemptions?
The declaration of dividends to the shareholders (whether in cash or in specie) could attract DWT.
There are certain exemptions with regards to DWT. The most notable exemption is that any distribution to another South African company is exempt from DWT. Please note that even though these distributions would be exempt from DWT, the necessary resolutions must be prepared and the relevant tax forms must still be submitted to SARS. We therefore request you contact us as soon as a distribution is approved in order for us to confirm the process that needs to be followed.
Loans to connected persons a pitfall for DWT
The granting of a loan to a shareholder or connected person to a shareholder (other than a South African company) could trigger DWT. It is important to discuss these loans with us to ensure effective planning of the company’s tax affairs. It is important to note that in terms of the Income Tax Act, as soon as a debit loan is created for a shareholder it could trigger DWT. In practice, your accountant may only be made aware of this a year or more later. This could result in the raising of a backdated DWT assessment.
As you are undoubtedly aware, when SARS raises an assessment on a previous period, penalties and interest will be imposed.
STC credits expiring on 31 March 2015
Theoretically there is no overlap between STC and DWT. Where a dividend was declared before 1 April 2012 (irrespective of actual payment date) it will have been subject to STC. Only where the dividend is declared and paid on or after 1 April 2012 will this be subject to DWT.
By changing the tax on dividends from STC to DWT, however, companies are allowed to utilise the credits on the STC system (dividends received that exceeded the dividends paid) to reduce the DWT payable. These credits can however only be utilised for dividends paid up to 31 March 2015.
Companies with STC credits should take advantage of the credits by paying dividends on or before 31 March 2015.
Multi-tier groups of companies will have to pay dividends all the way up and out of the group (before 31 March 2015) for the non-exempt shareholders to experience the benefit.
Should you require any assistance on this topic, do not hesitate to contact our office on 021 405 8500.
This article is a general information sheet and should not be used or relied on 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 business consultant for specific and detailed advice.