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News & Press: Transfer Pricing & International Tax

Withholding tax on interest paid to foreign persons

17 February 2013   (0 Comments)
Posted by: SAIT Technical
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By Nicole Paulsen (DLA Cliffe Dekker Hofmeyr Tax Alert)

Executive summary

Currently, interest paid to foreign residents are exempt in terms of section 10(1)(h) except where foreigners are physically present in SA for more than 183 during a year of assessment or conduct a business through a permanent establishment. In order to achieve alignment with international practice, a withholding tax of 15% will be levied on foreigners from 1 July 2013 in terms of section 37J of the Income tax Act.

Full article

Currently, South Africa's income tax system provides for a blanket tax exemption on all interest payable to foreign residents.

The exemption however does not apply where the foreign residents conduct business through a permanent establishment in South Africa or where the foreign residents are physically based in South Africa for more than 183 days during the relevant year of assessment. Accordingly, debt instruments issued to foreign residents who do not fall within the aforementioned categories, will be exempt from normal tax in South Africa.

In order to align the South African tax system with international global practice government announced in 2010 that it intended to introduce a withholding tax on interest paid to foreign residents at a rate of 10%. The proposed tax was to be effective from 1 January 2013 and the effect was that any interest that accrues, is received, becomes payable or is deemed to have accrued to a foreign resident on or after 1 January 2013, will be subject to withholding tax at the proposed rate.

However, on 11 December 2012, National Treasury issued a press release in which it stated that with effect from 1 July 2013, the South African government will introduce a withholding tax on interest at a rate of 15% [s37J of the Income Tax Act 58 of 1962 (the Act)]. In the press release, National Treasury specifically stated that the withholding tax will apply to all interest paid by South African residents to foreign residents, except of course where the foreign residents are subject to normal tax as outlined above.

In light of the important changes made to the withholding tax arena, it is important to consider the following administrative consequences:

The liability to withhold tax on interest will remain with the person making payment of the interest for the benefit of the foreign resident. However, ultimately the liability for the payment of the withholding tax will rest with the beneficial owner, being the foreign resident (s37JA read with s37L of the Act).

The trigger date for the withholding of taxes will be the date that the interest is paid or becomes due and payable and not the date that the amount has accrued to the foreign resident (s37JA of the Act).

Payment of withholding tax to the South African Revenue Service (SARS) must be made at the close of the month following the month in which the interest was paid (s37M of the Act).

A claim for a refund, in the case of an overpayment to SARS, must be made solely to SARS within three years after the payment of interest (s37N of the Act).

Furthermore, under the new withholding tax regime and in terms of s37K of the Act, there are certain exemptions which will apply to interest paid or accrued to foreign residents from the following sources:

Bonds issued by any sphere of government.

Listed debt instruments, for example, bonds listed on the Johannesburg Stock Exchange.

Any debt owed by a domestic bank or the South African Reserve Bank, Development Bank of Southern Africa and the Industrial Development Corporation.

Domestic dealer and brokerage accounts and domestic investment schemes in respect of bills of exchange, letters of credit or a similar instrument.

It is important to note that the withholding tax exemption does not apply to back-to-back loan agreements designed to avoid the 15% withholding tax.

In light of all the above, it can be concluded that the rationale behind the introduction of the proposed withholding tax on interest is to narrow the cross-border interest exemption in order to align it with international global tax practice.


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

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