New Dividend Tax Regime
02 January 2012
Posted by: Author: Steve Curr
New Dividend Tax Regime
This article sets out the more important aspects of the new dividend tax which is to replace secondary tax on companies in respect of dividends paid on or after 1 April 2012.
Current regime – secondary tax on companies
Dividends declared by South African resident companies currently attract secondary tax on companies (STC) at the rate of 10%, which is imposed on the company. Since the introduction of STC in 1993, there has been much debate among preparers of financial statements as well as shareholders as to whether STC should economically be regarded as a tax on the shareholder or a tax on the company. To add to the debate, SA inbound multinationals are unfamiliar with STC compared to a more traditional dividend withholding tax regime.
In February 2007, the Minister of Finance announced that STC would be withdrawn and replaced with a dividend withholding tax, which would be imposed on the shareholder, as opposed to the company. The implementation of this new tax has been delayed until 1 April 2012 to allow SA time to renegotiate its existing tax treaties.
Outline of new regime
The new dividends tax is levied at a flat rate 10% on dividends paid by SA resident companies on or after 1 April 2012. The introduction of the DT is part of a wider overhaul of the SA system for the taxation of dividends, which is beyond the scope of this article.
Key aspects of the DT:
•DT applies to dividends paid by SA resident companies, including close corporations, but will not apply to any ‘distributions’ by trusts, sole proprietors, partnerships or SA branches of foreign companies.Cash dividends paid by non-SA resident companies listed on the JSE will be subject to DT.
•DT is based on a dividend as defined for tax purposes, which broadly speaking includes all distributions to shareholders in cash or in-specie (including unrealised value), excluding any return ofshare capital.Share buy-backs are included (except JSE-listed buy-backs) and the issue of capitalisation shares is excluded.
•DT is imposed on the shareholder, however,the company/regulated intermediary (e.g.transfer secretaries, collective investments scheme or long-term insurer) is responsible for withholding this tax on behalf of SARS and paying the net amount to the shareholder.
•Although DT is a tax on the shareholder, any 2012 can be utilised for up to five years by a company declaring a dividend to reduce the amount of dividends subject to dividend withholding tax.
•Principal exemptions from DT:
•Dividends paid to SA resident companies or close corporations.
•Cash dividends paid by non-SA resident JSE-listed companies to non-SA resident shareholders.
•Dividends paid to SA pension, provident and retirement annuity funds.
•Dividends paid to regulated intermediaries(e.g. transfer secretaries).
•Dividends in excess of R200 000 perannum paid by incorporated micro businesses (taxed in a turnover basis).
•Principal compliance issues:
•DT to be withheld at 10% unless the shareholder provides an exemption certificate or double tax treaty certificate (providing for a lower withholding rate).
•The primary liability for DT rests with the shareholder (although withheld by the company/regulated intermediary), exceptin respect of dividends in-specie (i.e.non-cash) declared by SA companies,where the DT liability rests with the company declaring the dividend. In-specie dividends declared by non-SA companies are not subject to DT.
•No exemption certificate is required for dividends paid to a SA group company (broadly 70% common shareholding).
•No exemption certificate is required if the dividend is paid to a regulated intermediary (e.g. collective investment scheme or long-term insurer).
•A regulated intermediary has a responsibility to withhold DT subject to receipt of an exemption/tax treaty certificate.
•A person responsible for withholding the DT will become personally liable for the tax if they fail to withhold, and tax penalties may be imposed.
•Shareholders or directors responsible for the control/management of unlisted companies may become personally responsible for the DT.
•The DT withheld by the company or paid over to SARS by the end of the month following the month in which the dividend is paid.
•If a company utilises a balance of STC credits to reduce the amount of dividends declared subject to DT, it is required tonotify its shareholders of the pro rata amount of STC credits utilised to enable SA corporate shareholders to increase their balance of STC credits.
•The legislature has decided not to introduce a detailed anti-avoidance measure (as is currently the case for STC), but will rather rely on the general tax definition of a dividend, which will generally extend beyond formal dividend declarations, to include all transfers of value by a company to a shareholder or related party.
Planning considerations for SA companies before 1 April 2012.Some practical aspects which taxpayers should consider before the DT arrives:
•Documentation - Look out for SARS’s release of the DT forms and ensure you have gathered the necessary exemption/tax treaty certificates from shareholders.
•Pay special attention to the wording of dividend declarations in terms of:
•Timing – DT will be triggered upon the earlier of the date of payment of the dividend or the date on which the dividend is payable as opposed to the declaration date (as is currently the case for STC).
•Provide a breakdown of what is being distributed – a return of contributed tax capital (i.e. generally the contributed capital for company law purposes) will not attract DT.
•Consider delaying the payment of dividends until after 1 April 2012 if your shareholders may benefit from a tax treaty rate of less than 10%; for example,certain UK resident shareholders.
•Pay attention to the accounting for contributed capital which may not necessary accord with contributed tax capital, due to,for example, capitalisation shares issued.
•Re-evaluate possible deemed dividend sunder the new DT regime, which may be different from that under the current STC regime, e.g. low interest loans to shareholders or related parties.
•Ensure that any shareholder debit loans are properly regulated before 1 April 2012 for STC purposes; otherwise there may be aliability for STC and DT.
Source: By Steve Curr (TaxTALK)