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Section 10B exemption for foreign dividends

13 October 2014   (0 Comments)
Posted by: Author: SAIT Technical
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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).

But 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%?

Your 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.

It 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).  

We submit that the 25/40 principle will apply as the recipient of the foreign dividend is an individual.  

You 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 decision.



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