Section 10B exemption for foreign dividends
13 October 2014
Posted by: Author: SAIT Technical
Author: SAIT Technical
Q: We understand that should a South
African resident for tax purposes who is an individual own 40% (it is more than
10% and less than 50%, so no CFC rules) of the shares in a non-resident
company, receive a dividend, it is fully exempt for tax. (Section10B).
now, what if this 40% of this non-resident company is owned by an offshore
trust. The trust receives the dividend and distribute that dividend to the SA
resident in the same year it receives it, so the conduit pipe principle will
apply. Will this dividend still be fully exempt or will the 15/40 rule apply
and he will pay tax of 15%?
assistance would be much appreciated.
A: We agree with you that, in terms of
section 25B(1) or (2) (we assume (2)), the receipt of the distribution by the
beneficiary will also be a foreign dividend. In our view, the wording in
section 10B(2)(a) refers to ‘if that person … holds at least 10%…” and we are
not so sure that the mere vesting of a foreign dividend by the trust will imply
that the beneficiary actually holds the equity and voting rights in the
company. It is more likely that this is held by the trust. As the
taxpayer bears the burden to prove entitlement to the exemption it may well be
difficult to meet that onus in this regard.
is evident that the Income Tax Act does not cater for this scenario (as it does
for instance where a controlled foreign company is concerned).
submit that the 25/40 principle will apply as the recipient of the foreign
dividend is an individual.
may want to request an opinion from SARS in this regard.
Nothing in this
query and answer should be construed as constituting tax advice or a tax
opinion. An expert should be consulted for advice based on the facts and
circumstances of each transaction/case. Even though great care has been taken
to ensure the accuracy of the answer, SAIT do not accept any responsibility for
consequences of decisions taken based on this query and answer. It remains your
own responsibility to consult the relevant primary resources when taking a