The interest withholdings tax impact of a local trust distributing profits to foreign beneficiary
29 April 2015
Posted by: Author: SAIT Technical
Author: SAIT Technical
tax on interest paid to non-residents is going to be introduced. Many trusts
declare their annual profits at the end of each year to their beneficiaries.
Those distributions retain their nature of the original income that flowed into
If an annual distribution of trust profits is
made to a non-resident beneficiary at year end and, a portion of that
distribution is interest, will the trust have to withhold the tax on the
interest portion of the distribution?
Is this withholding tax subject to any double
tax agreements, or is it a full and final tax paid over irrespective of where
the beneficiary lives overseas?
When is the effective date for the introduction
of this legislation?
A: We accept that
with "many trusts declare their annual profits at the end of each year to their
beneficiaries” you mean that the trustees in terms of their mandate vested the
income in the beneficiaries.
Please note that the service offered by SAIT does not
include an opinion. 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 also
accept that none of the exemptions (section 50D) apply.
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) of the Income Tax Act will apply to this.
Section 50A does not define the word interest and we submit
that it must take its ordinary meaning.
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. On that basis
the trust, on paying the amount vested to the beneficiary, will be paying an
amount of interest for the benefit of a foreign person and the withholding tax
You may want to obtain the view of a tax specialist or a
ruling from SARS in this regard.
The withholding tax applies in respect of interest that is
paid or that becomes due and payable on or after 1 March 2015.
The interest is certainly subject to the treaties. SARS, on their web site has a very useful
summary of the treaties that provide for a lower rate of the tax. Remember that the rate can only be reduced if
the foreign person to or for the benefit of which the payment is to be made has
by a date determined by the person making the payment; or by the date of the
payment, submitted to the person making the payment the declaration prescribed
by SARS. The declaration confirms that
the interest is subject to that reduced rate of tax as a result of the
application of an agreement for the avoidance of double taxation.
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.