As is the case in many countries, companies are treated in South Africa as being tax resident if they are incorporated there or if their effective management and control is based in the country. Corporate tax residency can also be determined in line with rules laid out in South Africa’s 74 full double taxation avoidance agreements. The main rate of corporate income tax is 28% for both resident and non-resident companies, with tax affairs overseen by the South African Revenue Service (SARS). South African tax law requires that all local companies register for tax at incorporation, as even dormant companies must be registered.
Why residence status matters
The tax residence status of your South African company matters because i) resident companies are taxed in South Africa on their worldwide income, whereas non-resident companies are taxed only on their South African-sourced income and ii) companies with resident status enjoy access to the benefits of South Africa’s tax treaties.
While the main rate of corporate tax in South Africa is 28%, company income up to ZAR550,000 (approx. US$43,000) is taxed progressively for companies registered with SARS as a small business corporation. For a company with a taxable income meeting the upper threshold, the effective rate of tax is 10.8%, being ZAR59,451. However, thanks to the dividends tax (see below), this is seldom the final tax on corporate income.
Income from active trading is taxable, as are passive income and capital gains. However, special rules apply to how and to what extent the latter two forms of income are taxed. For more information, refer to the capital gains tax section below.
In addition to the main corporate tax on a company, any dividends declared by resident companies are subject to a further 15% tax payable by the beneficiary thereof. Fortunately, foreign shareholders can reduce this rate through the use of tax treaties, and often the tax can be written off against the shareholder’s own tax bill in their home jurisdiction. The reduced rates available to African-resident shareholders can be found here, and here is a list of reduced dividends tax rates for shareholders resident outside of Africa.
Although it is the eventual recipient of the dividend who is liable to the tax, South African dividends tax uses the mechanism of a withholding tax on dividends. The company itself, or a regulated financial institution holding the company’s shares on behalf of beneficiaries (for example fund investors) are responsible for withholding the dividends tax.
Dividends tax can be avoided by those owning non-resident companies in South Africa, as the tax applies only to resident companies. This is similar to the case for branches (known as foreign companies), which have no withholding tax applied to their branch remittances. Other exemptions to Dividends Tax were introduced earlier this year and can be found here.
South Africa also levies withholding taxes on interest and intellectual property royalties paid to non-residents. These are taxed at the same rate as dividends, being 15%.
Capital gains tax
Capital gains in South Africa are counted against a company’s income for corporate tax purposes. However, only 66.6% of capital gains income is taxable in this way, making it more tax efficient. South Africa also has a participation exemption for resident companies owning stakes of at least 10% in companies registered abroad for a period not less than 18 months. An additional criterion for this exemption to supply is that the sale of the shares must be made to a person resident outside of South Africa.
Value added tax
The compulsory threshold for VAT registration is ZAR1,000,000 of taxable supplies in a rolling 12-month period, which may be different from the company’s actual turnover figure depending on the type of business carried out. Companies with taxable supplies below this threshold may register voluntarily to take advantage of deductions for input tax. VAT in South Africa is 14%, with several lower rates on certain kinds of supplies (including a 0% rate for exports delivered abroad). However, such zero-rated exports are not exempt supplies and therefore count towards the ZAR1,000,000 threshold for mandatory registration.
South Africa amended the law on VAT for foreign sellers of electronic services to require local VAT registration if South African supplies exceed ZAR50,000/year. This is similar to the EU’s rules on digital services introduced this year by the VAT Directive. However, South Africa’s system differs in that it has a de minimis threshold. South African VAT-registered businesses are also obliged to advertise and quote the VAT-inclusive price, unlike in jurisdictions such as Singapore and the United States.
Professional services firms located in South Africa can charge a 0% rate of VAT on services delivered remotely to non-residents in many cases. VAT must be charged if the services relate to fixed property in South Africa, or to movable property due to be exported to the on-resident buyer. This is more permissive than even Singapore’s regime on GST, which considers services having a benefit within Singapore (e.g. incorporating a company) to be taxable.
For more information on South African VAT, read the Government’s comprehensive guide.
Payroll and social security taxes
South African companies with employees pay an extra 1% of gross employment costs for both payroll and social security. The 1% payroll levy goes towards further education for unskilled workers, but companies with annual payroll costs of under ZAR500,000 (approx. US$39,000) are exempt from this requirement. There is no such threshold before the obligation to pay social security takes effect, with 1% of gross employment income paid by the business directly and a futher 1% deducted from that employee’s gross salary.
Taxes on transfers of shares
There is a stamp duty (known as a Securities Transfer Tax) payable on the disposal of shares and other securities. This tax is 0.25% of the gross proceeds, with any profits accounted for under capital gains tax rules.
If you are interested in opening a business in South Africa, learn more on our page on the advantages and disadvantages of doing business in South Africa. Alternatively, contact our company incorporation experts directly:
Photo by Ken Teegardin, available under a Creative Commons Attribution-ShareAlike 2.0 Generic (CC BY-SA 2.0) license.