Dividends Withholding Tax – The importance of identifying the beneficial owner of a dividend
19 July 2012
Posted by: SAIT Technical
By Alwina Brand (TaxTalk)
Dividends withholding tax ("DWT”) was introduced on 1 April 2012, with the first filing deadline in respect of DWT returns and payments to the South African Revenue Service ("SARS”), occurring on 31 May 2012.
DWT is levied, at 15%, in respect of dividends paid by any company that is a South African tax resident, or by a company that is not a resident where the share in respect of which the dividend is paid is a share listed on the Johannesburg Stock Exchange (i.e. a dually listed entity).
Although DWT is administered and paid to SARS by the company or regulated intermediary which pays a cash dividend, the tax liability is that of the beneficial owner of the dividend. The beneficial owner will therefore receive a cash dividend net of DWT as the entity paying the dividend will withhold the DWT.
Section 64F of the Income Tax Act, No. 58 of 1962 ("the Act”) provides for an exemption from DWT where the beneficial owner of a cash dividend is:
• a company which is a resident;
• the South African government, a provincial administration or a municipality;
• a public benefit organisation approved by SARS in terms of section 30 (3) of the Act;
• a rehabilitation trust contemplated in section 37A of the Act;
• an institution, board or body contemplated in section 10 (1) (cA) of the Act;
• a fund contemplated in section 10 (1) (d) (i) or (ii) of the Act (a pension fund, pension preservation fund, provident fund, provident preservation fund, retirement annuity fund or a benefit fund);
• a person contemplated in section 10 (1) (t) of the Act (the council for scientific and industrial research, the South African Inventions Development Corporation and the South African National Roads Agency Limited);
• a shareholder in a registered micro business, as defined in the Sixth Schedule, paying that dividend, to the extent that the aggregate amount of dividends paid by that registered micro business to its shareholders during the year of assessment in which that dividend is paid does not exceed the amount of R200 000; and
• a non resident who receives a dividend from a non-resident company, listed on the JSE.
Although the above mentioned persons will be exempt from DWT, the company or regulated intermediary paying the dividend will only be entitled to exempt the dividend in question from DWT, if they are in possession of a declaration by that beneficial owner, in the form as prescribed by SARS, that the dividend is exempt from DWT in terms of section 64F of the Act.
When determining whether a dividend would be exempt from DWT the beneficial owner of the dividend must therefore be identified. That beneficial owner must file the requisite exempt declaration, as prescribed by SARS, with the company or regulated intermediary paying the dividend.
The term "beneficial owner” is defined in section 64D of the Act as "the person entitled to the benefit of the dividend attaching to the share”. Therefore, the beneficial owner will not necessarily be the registered owner of the share. A share is essentially a mere bundle of rights to which a shareholder is entitled. As such, one person may hold the right to registration, another may hold voting rights, while another may hold the right to dividends. The person entitled to the dividend rights attaching to a share would be the person who is required to make a declaration, as prescribed, to enjoy the exemption afforded by the provisions of section 64F of the Act.
It is important to note that the company or regulated intermediary paying the dividend is not required to determine who the beneficial owner of a share is and whether that person qualifies for an exemption in terms of the provisions of section 64F of the Act. The onus lies with the beneficial owner of the dividend to ensure that the prescribed declaration is filed timeously with the company or regulated intermediary paying the dividend in question.
It is therefore apparent that practical complications may arise in situations where dividends have been ceded, where persons hold shares in a nominee capacity and where shares are held by trusts. Companies and regulated intermediaries will generally only have details of the registered owners of shares as noted in the company's share register and may therefore not be aware of the details of persons other than the registered owner of the share who are entitled to dividends in respect of that share. It is therefore implied that a registered shareholder who is not the person entitled to the benefit of dividends attaching to the share should communicate with the person to whom such dividend rights attach, to ensure that the correct exempt declarations are filed in respect of that shareholding.
This is especially relevant in the instance of vesting trusts which hold share investments. The trust will be reflected as the registered shareholder but the beneficiaries who are entitled to the dividends in terms of the trust deed will be regarded as the beneficial owners of dividends paid in respect of the shares held by the trust in question. Unless the beneficiaries of the vested trust file exempt declarations with the company or regulated intermediary paying a cash dividend, the dividend will merely be paid to the trust net of DWT.
It is therefore important that companies, retirement funds and other persons qualifying for exemption from DWT in terms of the provisions of section 64F of the Act, who are beneficiaries of a vested trust, approach the trustees of the trust to assist them in filing the correct exempt declarations with companies and regulated intermediaries for DWT purposes. In the absence of such a declaration, the trust will receive a dividend net of DWT and will only be in a position to distribute the net dividend to the beneficiaries.
Where shares are held by discretionary trusts, it is arguable whether the beneficiaries of the trust may be regarded as the beneficial owners of dividends declared to the trust. Beneficiaries of a discretionary trust do not have an unconditional right to dividends earned by the trust. The beneficiaries are only entitled to the dividends once the trustees exercise their discretion to distribute dividends to the beneficiaries; in the interim these beneficiaries merely have a spes or hope in this regard. As such, it would not be possible for beneficiaries of discretionary trusts to file exempt declarations as these beneficiaries are not entitled to the benefit of dividends attaching to the shares held by the trust, unless the trustees exercise their discretion in this regard. Therefore, it appears as the most practical solution in this regard may be for the beneficiary of a discretionary trust to approach the company or regulatory intermediary for a refund in instances where the trustees exercised their discretion to distribute dividends within a specific year of assessment. The exempt beneficiary will be obliged to file their exempt declaration with the company or regulated intermediary upon application for the refund. This will nevertheless result in a huge administrative burden for both the payer of the dividend as well as the beneficiaries.
It is therefore advisable for companies, public benefit organisations and retirement funds which hold investments through trusts (for example hedge funds, charitable trusts, etc) to determine whether the investment vehicle is structured as a vesting or discretionary trust. Where these entities are beneficiaries of vesting trusts, they should ensure that the prescribed exempt declarations are filed with the companies or regulated intermediaries paying dividends to the trust to ensure that the dividends are not subject to DWT. In instances where these entities are beneficiaries of discretionary trusts, they should be aware of the fact that dividends paid to the trust will attract DWT at 15%.