RESIDENCE BASED TAX

RESIDENCE BASED TAX

Residents are taxed on their worldwide income, subject to certain exclusions.

Definition of resident

Natural Person (see flowchart further in this guide)

  • any natural person who is ordinarily resident in South Africa; or
  • any natural person who is not ordinarily resident in South Africa but who:
    • is physically present in South Africa for a period exceeding 91 days in aggregate during the current year of assessment and for a period exceeding 91 days in aggregate during each of the prior 5 years of assessment; and was physically present in South Africa for a period exceeding 915 days in aggregate during the previous 5 years of assessments.
    • Where a person has been outside of South Africa for a continuous period of at least 330 full days after he ceases to be physically present in South Africa, he will be deemed to not have been a resident from then.
    • South African resident employees who render services for any employer outside South Africa for a period which in aggregate exceeds 183 full days commencing on or ending during a period of assessment, and for a continuous period exceeding 60 full days during such 183 day period, will not be liable for income tax on their remuneration for that period.

Companies and Trusts

A company and Trust will be considered to be resident for tax purposes if it is incorporated, established, formed or has its place of effective management in South Africa.

Controlled Foreign Companies (CFC)

A Controlled Foreign Company (CFC) means any foreign company where more than 50% of the total participation rights or voting rights are directly or indirectly exercisable by one or more residents. South African residents must impute all income of a CFC in the same ratio as the participation rights of the resident in such a CFC, subject to a number of exclusions. Net income of the CFC is defined as the CFC’s taxable income determined as if the DVD is a South African taxpayer.

Foreign dividends (including deemed dividends)

Foreign Dividends received from a non-resident company are taxable.

Foreign dividends are however exempt as follows:

  • If received by a resident who holds at least 10% of the equity shares in the foreign company;
  • The shareholder is a company which is in the same country as the foreign company paying the dividend;
  • If declared by a company listed on the SA stock exchange;
  • If paid out of the profits of a foreign company if the profits of the foreign company have been included in the South African shareholders income in terms of the CFC provisions.

Where a foreign dividend is not exempt in terms of the provisions above the following part of a foreign dividend will be exempt from tax:

  • Individuals and trusts: 26/41 or 63% of the foreign dividend received;
  • Companies: 13/28 or 46% of the foreign dividend received.

No deduction will be granted for any expenditure incurred in the production of income in the form of foreign dividends.

Foreign tax credits

Residents are allowed to deduct all foreign taxes paid in respect of foreign source income from the tax payable in South Africa on such foreign income. Any excess credits may be carried forward.

Where foreign tax is withheld on South African source income, the taxpayer can claim a deduction against income.