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Is the withholding tax on interest applicable to non-resident beneficiaries of a trust?

04 February 2015   (0 Comments)
Posted by: Author: SAIT Technical
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Author: SAIT Technical

Q: Would non-resident beneficiaries of a trust be subject to new withholding tax (WHT) on interest? Where a SA trust pays interest income to a discretionary non-resident beneficiary would such interest fall within the ambit of the WHT on interest? 

The exemptions in terms of section 50D(3) of the Income Tax Act are not applicable as these non-resident beneficiaries are not physically present in SA for more than 183 days nor is the debt effectively connected to a permanent business establishment of that non-resident which is registered for tax.

I am therefore of the view that such interest would become subject to this withholding tax as the wording of section 50C is very broad and would cover this scenario. However, others are of the following view: A "distribution" from a trust would not be regarded as a "payment" of interest from resident to a non-resident as the beneficial owner of that interest is the trust until such time as the trustees exercise their discretion to distribute (i.e. not the same as pay) that interest to the non-resident beneficiary. Therefore such distributions should not fall within the ambit of the WHT on interest provision.

A: This is a complex part of tax law and may require an expert opinion.  For purposes of our guidance we assumed that the non-resident beneficiary doesn’t have a vested right to the interest – in other words, it is a discretionary right.  It was also accepted that the interest is not payable in respect of a loan from the non-resident.  We accept your view that none of the exemptions (section 50D) apply and also assume that the relevant treaty, if any, doesn’t provide otherwise. In essence therefore, the interest accrued to the trust from a source in the RSA and will be paid out to a foreign person (the beneficiary) in consequence of a decision by the trustees. Section 25B(2) will apply to this. The effect of section 25B(2) is that, for tax purposes, the interest so vested in the year of accrual is deemed to not have been received by the trust, but by the beneficiary.

It is our view the payment by the trust to the beneficiary is merely a form of distribution (i.e. distribution is a collective term to transfer value from the trust) by a trust and therefore the two concepts are not necessarily mutually exclusive. Where an amount of interest is distributed by way of approved payment and such amount constitutes interest accrued to the beneficiary (i.e. section 25B ITA) then we agree that it would be subject to withholding in terms of section 50B ITA if the beneficiary is a non-resident. In our view this would be intended, otherwise the whole regime can be circumvented by just inserting a SA Trust between the SA payor and non-resident recipient which would not be intended from a tax policy perspective.

You may want to obtain the view of a tax specialist or a ruling from SARS in this regard.  

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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