We have compiled a list of 4 common challenges that are faced when starting an offshore company
South African Corporate Tax information
SOUTH AFRICA TAX INFORMATION
Corporate – Tax administration
Taxable period
The corporate tax year is the same as the company’s financial year. It may be changed upon application showing reasonable cause.
Tax returns
Annual income tax returns must be submitted within one year from the end of the company’s tax year. The annual tax return includes a supplementary reconciling return where requested. Furthermore, schedules apply for CFCs, short-term insurers, mining companies, headquarter companies, and learnership allowances.
‘Signed off’ financial statements are required to be submitted with the annual tax return.
Payment of tax
Payments are made with provisional returns filed at six-month intervals from the tax year-end based on an estimate of taxable income for the year. Interest is charged on any underpayment outstanding for more than six months after the tax year-end, except in the case of February year-ends, in which case it is seven months. Any balance (together with interest) is then paid following assessment.
Tax audit process
There is no prescribed audit process, and an audit can be initiated by any factor as determined by the SARS. The audit or inspection will commence with a request from the SARS for the taxpayer to make available any such records or information as may be required.
Statute of limitations
Tax debts to the state prescribe after a period of 15 years. Tax returns submitted that have been assessed may not be reopened after a period of three years from date of assessment by the SARS or five years if it is a self-assessment by the taxpayer, unless there has been fraud, misrepresentation, or non-disclosure by the taxpayer.
The prescription period may be extended by three years in the case of an assessment by the SARS or by two years in the case of self-assessment in respect of certain complex matters, such as transfer pricing and general anti-avoidance cases.
Topics of focus for tax authorities
The SARS, in their 2020/21 to 2024/25 Strategic Plan, stated that the key strategic focus of the SARS will be the following:
- Providing clarity and certainty for taxpayers and traders of their obligations.
- Making it easy for taxpayers and traders to comply with their obligations.
- Detecting taxpayers and traders who do not comply, and making non-compliance hard and costly.
- Developing a high performing, diverse, agile, engaged, and evolved workforce.
- Increasing and expanding the use of data within a comprehensive knowledge management framework to ensure integrity, derive insight, and improve outcomes.
- Modernising SARS systems to provide digital and streamlined online services.
- Demonstrating effective resource stewardship to ensure efficiency and effectiveness in delivering quality outcomes and performance excellence.
- Working with and through stakeholders to improve the tax ecosystem.
Corporate – Group taxation
Group taxation is generally not permitted in South Africa. However, relief is given for transactions between group companies to allow for reorganisations, provided certain requirements are met.
In general, the relief will only apply to transactions between companies within the same group. A group of companies is defined as a controlling company and one or more controlled companies in relation to that controlling company. A controlling company means a company holding, directly or indirectly, at least 70% of the equity shares of any other company. Foreign-incorporated companies do not form part of a group of companies for the purposes of this relief unless effectively managed in South Africa, although relief is extended to controlled foreign companies (CFCs) in certain circumstances.
Corporate rollover relief is available for asset-for-share transactions, amalgamation transactions, intra-group transactions, unbundling transactions, and transactions relating to liquidation, winding-up, and deregistration.
The relief may cover the capital gains tax arising from the disposal of capital assets, income tax arising from the disposal of a depreciable asset, income tax arising from the disposal of trading stock, donations tax arising from the disposal of an asset, dividends tax, VAT, securities transfer tax, and transfer duty.
Transfer pricing and thin capitalisation
South Africa has transfer pricing legislation applying to cross-border transactions involving connected persons. The transfer pricing legislation applies the arm’s-length standard.
The transfer pricing legislation does not separately address transfer pricing and thin capitalisation. Rather, thin capitalisation is simply treated as a potential breach of the general arm’s-length standard (i.e. in relation to the level of funding).
Where a transfer pricing adjustment is required to be made, that adjustment is subject to a secondary adjustment where it is deemed to be either a dividend or a donation.
In addition, South Africa has formally adopted the OECD’s three-tiered documentation approach, and certain taxpayers are required to electronically submit Country-by-Country Reports, Master File, and/or Local File returns within 12 months of the end of their financial year.
The SARS has also, in recent years, expanded the transfer pricing questions contained in the CIT returns. In answering these questions, taxpayers are required to make a full disclosure of all requested information, as well as any information that may be relevant.
Controlled foreign companies (CFCs)
If one or more residents together, directly or indirectly, hold more than 50% of the voting or participation rights in a foreign company, then it is a CFC in relation to those residents. The income of a CFC is imputed to the residents in proportion to their holdings, subject to certain exclusions and tax credits, where applicable. The most notable exclusions are for high-taxed CFCs and for income attributable to ‘foreign business establishments’.
Corporate – Branch income
SA branches of foreign companies are not considered to be separate legal entities for tax purposes, and no tax is withheld on transfers of profits to the head office. Branches of foreign companies are taxed at a rate of 28% and are not liable for dividends tax or any branch profits repatriation tax. In line with the announcement that the CIT rate will be reduced from 28% to 27% for tax years commencing on or after 1 April 2022, it is expected that the branch tax rate will also be reduced to 27% effective the same date as the reduction in the CIT rate.
Note that a branch must register as a taxpayer and submit tax returns. Separate financial statements must be drawn up for the SA branch. For all practical purposes, the SARS will treat the branch as a separate entity. For example, inter-branch cost recoveries levied by the head office incurred in the production of SA income normally will be allowed as a deduction by the branch, although this treatment is not extended to interest on inter-branch loans.
In terms of DTAs, the taxation of branches is limited to cases where the branch constitutes a PE.
Corporate – Tax credits and incentives
Foreign tax credit
The South African Income Tax Act makes provision for a rebate against CIT in respect of foreign taxes paid on foreign-sourced income or a deduction against income of foreign taxes paid on SA-sourced income. In both instances, the taxpayer must be an SA resident, the income must be included in taxable income, and that income must have been subject to a foreign tax that is not recoverable. The rebate is limited to the total normal tax payable calculated by applying the ratio of the total taxable income attributable to the foreign tax to the total taxable income. The deduction, however, may not exceed the income on which the foreign tax was levied.
Research and development (R&D)
The current costs related to certain R&D activities carried on in South Africa are 150% deductible, subject to pre-approval by a government-appointed approval committee. The cost of machinery and other capital assets acquired for the purposes of R&D may be depreciated 40% in the first year of use, 20% in the second, 20% in the third year, and 20% in the fourth year. Buildings used in the process of R&D may be written-off over a 20-year period.
Headquarter company regime
A ‘headquarter company’ regime encourages the use of South Africa as a location for intermediate holding companies.
The main benefits offered to a headquarter company are:
- Exemption from South Africa’s CFC rules.
- Exemptions from dividend WHT on the headquarter company’s dividend distributions.
- Exemption from the WHT on interest in certain circumstances.
- Exemption from South Africa’s transfer pricing rules on back-to-back loans, outbound loans, back-to-back intellectual property (IP) licensing arrangements, and outbound IP licensing arrangements.
- The participation exemption for dividends received from, or gains derived on the disposal of, foreign qualifying holdings (these exemptions are not specific to headquarter companies but are available generally to SA-resident shareholders).
The requirements for a headquarter company are as follows:
- The headquarter company must be SA resident.
- Each shareholder in the headquarter company must hold at least 10% of the headquarter company’s equity shares and voting rights. This means that a headquarter company can never have more than ten shareholders.
- At least 80% of the headquarter company’s assets (measured on a ‘cost’ basis and excluding cash and certain bank deposits) must be comprised of certain assets related to the foreign companies in which the headquarter company holds at least 10% of the equity shares and voting rights. Specifically, these assets must be:
- the equity shares in those companies
- loans to those companies, and
- IP licensed to those companies.
- At least 50% of the headquarter company’s gross income must be comprised of dividends, interest, royalties, rentals, service fees, or proceeds from the sale of equity shares or IP from its 10%-plus holdings, where the gross income exceeds ZAR 5 million.
Industrial policy projects
In 2008, a ZAR 20 billion incentive package for investors in energy efficient projects was announced. The incentive is available for industrial projects participating in the manufacturing sector (other than alcohol or alcohol-related products, tobacco or tobacco-related products, arms and ammunition, and biofuels, which have a negative impact on food security). Companies are divided into those with a qualifying status and those with a preferred status. The status is determined in terms of a point system.
The proposed project must either be a ‘brownfield project’ (expansion or upgrade of an existing industrial project) or a ‘greenfield project’ (a wholly new industrial project, which uses new and unused manufacturing assets). Approved projects may be granted a tax allowance known as an additional investment allowance equal to 55% (100% if located in an industrial development zone) of the cost of any manufacturing asset used in an industrial policy project with preferred status or 35% (75% if located in an industrial development zone) of the cost of any manufacturing asset used in any other approved industrial policy project.
The additional investment allowance may not exceed ZAR 900 million in the case of any greenfield project with a preferred status, ZAR 550 million in the case of any other greenfield project, ZAR 550 million in the case of any brownfield project with a preferred status, or ZAR 350 million in the case of any other brownfield project.
In addition to the above, a company may also claim a deduction known as an additional training allowance.
Special Economic Zones (SEZs)
An SEZ incentive has been introduced for companies carrying on business in an SEZ comprising of a reduced corporate tax rate of 15% as well as a 10% allowance in respect of the cost of new and unused buildings owned by a qualifying company or any new or unused improvements to any building owned by a qualifying company.
In addition, employment incentives have also been introduced for employers carrying on a trade in an SEZ that will allow for an employees’ tax reduction for the employer in respect of qualifying employees, up to a prescribed monthly amount.
Energy efficiency savings
The energy efficiency savings incentive provides an income tax deduction to qualifying taxpayers. The deduction equates to ZAR 0.95 for each kilowatt hour (or equivalent) saved by the taxpayer during the relevant year of assessment against a baseline from the beginning of the year.
International shipping incentive
Income from international shipping of a resident company that holds a share in a South African flagged ship is exempt from income tax. Qualifying shipping companies can also use a currency other than the rand as their functional currency.
Venture capital companies
In order to assist small and medium-sized businesses to raise capital to finance businesses, a tax incentive for investors in small and medium-sized enterprises through venture capital companies was introduced.
A deduction is allowed from the income of a taxpayer in respect of expenditures actually incurred by that person in respect of the acquisition shares issued to that person by a venture capital company.
No deduction will be allowed in respect of shares acquired after 30 June 2021, and it was announced in the February 2021 National Budget that this date will not be extended.
Corporate – Withholding taxes
Payments to residents
The only payments to residents that are subject to WHT are in respect of dividends, although resident companies are exempt from the dividend WHT.
Royalties payable to non-residents
Royalties and know-how payments made to non-residents for the use of or right to use IP rights in South Africa are deemed to be from an SA source. The payer of the royalty or know-how payment is obligated to deduct a WHT of 15% of this payment, which is a final tax payable by the recipient of such income.
Dividends payable to non-residents
A dividend WHT of 20% applies to any dividend paid by a resident company to a non-resident or by a non-resident company to a non-resident where the shares in respect of which the dividends are paid are listed on a South African exchange. The tax is imposed on the beneficial owner of the dividend and not on the company, with the exception of in specie dividends. The payer of the dividend or regulated intermediary is required to deduct the 20% WHT from the payment. The treaty rate is the maximum allowable rate to be charged by the treaty countries; where this rate is higher than the domestic tax rate, the latter will apply.
Interest payable to non-residents
A 15% WHT on interest applies to interest payable from an SA source to non-residents on certain debt instruments. The resident payer of the interest is required to deduct the 15% WHT from the payment.
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