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SOUTH AFRICAN WITHOLDING TAX

August 2008 - Tax & Private Client. Legal Developments by Bowman Gilfillan .

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One of the questions frequently asked by foreigners who want to do business in South Africa is whether South Africa imposes withholding taxes on payments made to non-residents. The response to this is often that we only have a withholding tax on royalties. However, this is not correct and is becoming less true every year, as the South African legislator apparently realizes the benefits offered by the imposition of withholding taxes.

One of the questions frequently asked by foreigners who want to do business in South Africa is whether South Africa imposes withholding taxes on payments made to non-residents. The response to this is often that we only have a withholding tax on royalties. However, this is not correct and is becoming less true every year, as the South African legislator apparently realizes the benefits offered by the imposition of withholding taxes.

Withholding taxes with respect to non-residents provide the South African Revenue Service ("SARS")SARS with a collection mechanism, saving SARS the trouble of chasing after foreigners who do not pay their South African taxes.

Most withholding taxes provide for the personal liability of a person who fails to withhold. It is thus very important for any person making any payment to a non-resident to consider whether he has a withholding obligation before he makes such payment.

Some of the withholding taxes apply specifically with respect to non-residents, but it is often overlooked that other "local" withholding taxes such as employees' tax could also result in a withholding obligation with respect to non-residents.

Withholding obligation with respect to the non-resident seller of immovable property

In terms of section 35A, a new section of the Income Tax Act ("the ITA") which came into effect on 1 September 2007, any person (resident or non-resident) who purchases South African immovable property from a non-resident is obliged to withhold between 5% to 10% from the purchase price if the purchase price exceeds R 2 million. Immovable property could in certain circumstances include the shares in a company which owns South African immovable property.

Any amount so withheld must be paid to SARS within a certain time period. Estate agents and conveyancers are obliged to notify the purchaser in writing if the seller is a non-resident and if there may be a withholding obligation.

Although provision is made for the personal liability of purchasers who fail to withhold the tax, and of estate agents and conveyancers who fail to notify the purchaser, this will generally only apply if the person knew or should reasonably have known that the seller is a foreigner.

Taxation of foreign entertainers and sportspersons

Since 1 August 2006, amounts paid to foreign entertainers and sportspersons for "specified activities" in South Africa are subject to income tax at a flat rate of 15%. Specified activities include any personal activity exercised in South Africa by a person as an entertainer or sportsperson. Any resident who is liable to pay such amounts to a foreign entertainer or sportsperson is obliged to withhold the tax and pay it over to SARS, failure of which could result in the personal liability of the resident. There is also an obligation on any resident who is primarily responsible for founding, organizing or facilitating a specified activity in South Africa to notify SARS of such activities.

Employees' tax withholding with respect to non-resident service providers

South African employers are obliged to withhold employees' tax from remuneration paid to foreign employees who render services in South Africa in respect of their South African tax liability, if any.

However, businesses often do not realise that they may also have an employees' tax withholding obligation with respect to services rendered by a non-resident service provider or with respect to labour supplied by a non-resident labour broker. Payments to independent contractors (individuals) and labour brokers could present specific withholding problems in an international context.

The Fourth Schedule to the ITA ("the Fourth Schedule"), which deals with employees' tax, currently differentiates between individuals, labour brokers, personal service companies ("PSC's") and personal service trusts ("PST's").  Resident independent contractors are not regarded as employees for employees' tax purposes if they carry on their trade independently, but this exclusion does not apply to non-residents ("the non-resident inclusion").

Furthermore, a labour broker will be subject to employees' tax withholding unless the labour broker has been granted a so-called labour broker exemption certificate.  Although there is no prohibition against foreign labour brokers applying for labour broker exemption certificates, it is often impossible for foreign labour brokers to comply with the requirements. Accordingly, payments to foreign independent contractors or labour brokers could be subject to an employees' tax withholding obligation.

The recently released draft Revenue Laws Amendment Bill, 2008, ("the draft RLAB") includes a number of changes to the Fourth Schedule.  It is proposed that the different concepts referred to above will be replaced with one concept, namely that of a "personal service provider" ("PSP"), with a uniform set of criteria and rules to be applied to (what is currently referred to as) independent contractors, PSCs, PSTs or labour brokers. However, it would still be important to consider the relevant provisions prior to making payment to any service provider to determine whether the payer will have an employees' tax withholding obligation.  In addition, the draft RLAB does not provide for the deletion of the current non-resident inclusion.  It would be important to delete this inclusion, to ensure the effectiveness of the new streamlined employees' tax withholding provisions with respect to service providers.

Royalties or similar payments to non-residents

Persons who pay royalties or similar payments to a non-resident for the use of intellectual property in South Africa, or for imparting scientific, technical, industrial or commercial knowledge or information for use in South Africa are required to withhold tax at 12% from such royalty payments.

Dividend withholding

It was announced in the 2007 Budget Speech that Secondary Tax on Companies ("STC") will be phased out and replaced with a new Dividends Tax.  The core elements of the new Dividends Tax are set out in the draft RLAB.  It is anticipated that it will replace STC during late 2009. The Dividends Tax will contain a withholding mechanism in terms whereof the company declaring the dividend will be the party mainly responsible for collection.  Its implementation is contingent upon the renegotiation of a number of double tax agreements (DTAs) which currently provide for the reduction of withholding tax on dividends to 0%.

Potential effect of a DTA on the above withholding obligations

South Africa has a wide network of Double Tax Agreements ("DTA's"), also referred to as international treaties. Should the person receiving payment be a resident of a treaty country, the terms of the DTA should be considered to determine whether this would have any effect on the withholding tax. A DTA could, for example, reduce or eliminate the royalty or new Dividend Tax withholding rates or provide tax relief to foreign employees.

It is clear from the above that any person making payment to a foreigner will be well advised to consider any potential withholding obligation before making such payment. Failure to do so may result in such person having to pay SARS and then chase after the foreigner for a refund.

Aneria Bouwer is a senior associate in the Corporate Department at Bowman Gilfillan.

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