The definition of a dividend in South African law can be quite complex – the concept of what constitutes a dividend goes much wider than “ordinary” dividends.

The Income Tax Act No. 58 of 1962 (the “Income Tax Act”) defines a “dividend” as:

“any amount transferred or applied by a company that is a resident for the benefit or on behalf of any person in respect of any share in that company, whether that amount is transferred or applied—

(a) by way of a distribution made by; or

(b) as consideration for the acquisition of any share in…”

This is complicated by the Companies Act, No 71 of 2008, which further defines the term “distribution”, to include numerous types of transactions one would not normally think to be a dividend. For example, a distribution will include the waiver of a loan owed by a shareholder to the company, if the reason for the debt waiver is related to them holding a share in that company. The waiver represents the transfer of an amount by way of a distribution by the company. It also includes the acquisition by the company of any of its shares, or the shares of any company within the same group of companies.

Whose dividends are taxed?

Local dividends that South African tax residents receive are generally exempt from income tax under section 10(1)(k) of the Income Tax Act. The fact that these dividends are exempt from income tax doesn’t necessarily mean that they aren’t subject to another kind of tax. In the case of foreign dividends received by a South African tax resident, section 10B of the Income Tax Act provides for a partial exemption. But dividends tax could still be imposed by the foreign state, in terms of their domestic legislation or a double taxation agreement.  If a double taxation agreement with South Africa is in place, local dividend withholding tax (levied at 20%) is more likely than not to be reduced.

Dividend tax is imposed at a rate of 20% on all dividends that are declared and paid by South African tax residents. There are instances in which dividends tax will not be levied, specifically where the shareholder is either a South African resident company, a South African retirement fund, or another person prescribed as exempt. The beneficial owner of a dividend (typically the shareholder), is generally the one liable for dividends tax. However, if the dividend is an asset in specie (ie: the asset itself, rather than its cash equivalent), the liability falls on the company paying the dividend, and not on the shareholder.

Dividends tax operates as a withholding tax

Dividends tax operates as a withholding tax. The company that declares the taxable dividend must withhold and pay an amount directly over to SARS on behalf of the recipient taxpayer.

However, there are instances in which a dividend-declaring company is freed from the obligation to withhold dividends tax. Specifically, the company would not have to withhold the dividends tax if the dividends are declared to identified persons. These instances would also include the following:

• Where the shareholder has (before the dividend payment), notified the company (in the prescribed manner), that the dividend is exempt from dividends tax in terms of section 64F of the Income Tax Act;
• Where the shareholder has notified the company (in the prescribed manner) that the shareholder has changed, or that the circumstances affecting an exemption have changed;
• Where the shareholder forms part of the same group of companies as the dividend‑declaring company;
• Where the payment is made to an intermediary.

Where a regulated intermediary pays a dividend, it is responsible for withholding the dividends tax.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.