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Will section 23M of the ITA apply if the recipient of interest is subjected to withholding tax

20 January 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Will section 23M of the ITA apply if the recipient of interest is subjected to withholding tax on interest?

Q: A SA subsidiary company received a loan from its non -resident holding company. The non-resident company will be subjected to withholding tax on interest. Will section 23M; limit the interest deduction for the SA subsidiary. Will section 23M apply if the recipient of interest is subjected to withholding tax on interest?

A: With regards to your query section 23M of the Income Tax Act (ITA), will only apply if the interest is not "subject to tax” (s23M (2) (b) (ii) (AA)). There is no separate definition of "tax” in section 23M ITA and section 1 of the ITA definition applies, which merely includes "tax and any penalty”.

Section 50B(1) of the ITA states that "there must be levied for the benefit of the National Revenue fund a tax, to be known as the withholding tax (WHT) on interest”.  This tax is levied on the foreign recipient per section 50C (1) of the ITA who is liable therefore. In our view the WHT on interest does therefore constitute a "tax” for the purposes of section 1 and section 23M of the ITA and the interest would have been subject to tax in the hand of the person to whom it accrues, if the WHT on interest was applied to such amount. 

Disclaimer: 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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