Foreign investors should thoroughly plan before they invest in South Africa. Once they have done that, it should be a smooth process, as the country’s tax system is among the most developed in the world. South African residents are taxed on their worldwide income. Non-residents are taxed only on their South Africansourced income. A company is considered a South African resident if it is incorporated or has its place of effective management in South Africa. An individual is considered a resident if he or she is ordinarily resident here or is physically present here for a specified number of days over a five-year period.
A person who is deemed a resident of another state through the application of a double-tax agreement (DTA) will not be treated as a South African resident. South Africa has entered into DTAs with most of its trading partners. Under such arrangements a foreign resident will be taxable in South Africa only if he or she conducts business through a permanent establishment in South Africa, with a few exceptions.
South African firms are taxed at a rate of 28%. A 15% dividends withholding tax is levied on declared dividends. This tax will generally be withheld by the company paying the dividend or a paying intermediary, and the net dividend will be paid to the shareholder. South African branches of foreign companies are taxed at a rate of 28%. The dividend withholding tax is not imposed on the remittance of branch profits. Capital gains earned by companies are taxed at 18.6%.
Non-residents in South Africa may pay capital gains tax on the disposal of: immovable property or any interest or right to immovable property, and any asset of a permanent establishment through which they carry on trade in South Africa. Individuals are taxed on a sliding scale, with the highest marginal rate being 40%. Capital gains earned by individuals are also taxed at an effective rate of 13.3%. There are certain exemptions.
Interest paid to foreign lenders is not taxable unless they have a permanent establishment in South Africa. As of January 1, 2015 interest may be taxable in South Africa at the withholding tax rate of 15%. This withholding tax is a final tax. Certain DTAs will reduce the rate, in some case as low as 0%. There is a withholding tax on royalties paid offshore of 12%, which may be reduced through a DTA; however, on January 1, 2015 this will be increased to 15%. A 15% withholding tax on service fees will be introduced on January 1, 2016. This applies to non-residents providing services within South Africa. The withholding tax on services may also be reduced per various DTAs, and in certain cases the rate is 0%. Transfer pricing rules apply and are enforced. Three provisional tax payments are made each year.
The Commissioner for the South African Revenue Service may adjust the consideration in respect to any international transaction between connected parties to reflect arm’s length price. This is to ensure that there is a fair return on the activities conducted, the products contributed and the risks assumed in South Africa. If prices between connected parties from different jurisdictions do not reflect an arm’s length price, the South African taxpayer’s taxable income could be increased. Transfer pricing adjustments will result in additional tax, interest and penalties. Although a transfer pricing policy document is not required by law, it is advisable to prepare and maintain such policy documents to defend prices if they are ever challenged.
Businesses must register as an employer with the South African Revenue Service (SARS) and Pay As You Earn (PAYE) must be withheld on a monthly basis from remuneration paid to employees. Social security taxes are collected through the PAYE system. Value-added tax is levied at a rate of 14% on taxable supplies made by vendors. An importer/exporter has to register with SARS to obtain a Customs code number, and Customs duties are payable on various goods imported into South Africa. Importers must ensure that they are using the correct tariff classification for imported goods and that they apply for import permits where required. A Securities Transfer Tax of 0.25% is also levied on the transfer of shares but not on the issue of new shares.
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