INTEREST earned by non-residents from South Africa is generally exempt from income tax.
Only under limited circumstances will non-residents be liable for income tax in South Africa. This is in the case of:
• A natural person, if that person is physically present in South Africa for more than 183 days in the tax year;
• If a person carries on business through a permanent establishment in South Africa.
Therefore the vast majority of non-residents currently earning interest from South Africa would not be subject to income tax in this country.
This is all set to change from January 1, 2013.
According to the Taxation Laws Amendment Act, 2010, which was promulgated on November 2, a new withholding tax on interest has been introduced for the Income Tax Act.
The tax will be levied at a rate of 10% of the interest received by or accruing to a foreign person (who is not a controlled foreign company).
The tax rate of 10% may be reduced if there is a double tax agreement in place with South Africa that provides for a lower rate of tax on interest.
The person who pays the interest is responsible for withholding the correct amount of the tax and paying it over to the South African Revenue Service within 14 days after the end of the month in which it was withheld.
There are some exemptions from the application of the withholding tax on interest.
Interest received by or accruing to a foreign person will be exempt if the interest is earned:
• On a government debt instrument;
• On a debt instrument that is listed on certain recognised exchanges;
• On a debt owed by a bank or the South African Reserve Bank;
• On certain bills of exchange, letters of credit or similar instruments to the extent that the interest is payable on the purchase price of goods imported into the country (and provided certain requirements are met);
• On any debt owed by a foreign person (with two exceptions);
• From a headquarters company (provided certain requirements are met).
Therefore, for example, if a South African company pays interest to a foreign shareholder, and the above exemptions do not apply, the double tax agreement between the two countries do not provide for a lower rate of tax.
The South African company would then be obliged to withhold tax at a rate of 10% on any interest it pays to the foreign shareholder.
This is likely to affect many companies who have raised foreign debt capital or have loans from foreign-related parties.
It represents a fundamental shift in the way South Africa’s tax interest flows out, and has no doubt been put in place to protect the tax base from erosion.