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Ruling On Dividends Tax On Shares Held By Local Branches

Monday, 24 June 2013   (0 Comments)
Posted by: Author: Heinrich Louw
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Author: Heinrich Louw (Cliffe Dekker Hofmeyr)

The South African Revenue Service (SARS) published Binding Private Ruling 148 (ruling) on 19 June 2013.

The ruling deals with whether the dividends tax rate applicable to dividends paid on shares held by a local branch of a foreign company can be reduced by a relevant double taxation agreement. The facts are briefly as follows:

The applicant is a company that is part of a global group with headquarters in Japan. The applicant has a local branch through which it operates in South Africa. The branch mainly acts as agent for the applicant in respect of purchasing and selling commodities. Where the branch acts as buying agent, it earns commission based on the value of the commodities procured

The applicant (together with the branch) holds a 49% equity stake in a local private company. Of the 49%, 2% is held by the branch. The branch has a right to dividends and capital gains in respect of its 2% shareholding in the local company. The branch also shares in the funding obligations relating to its 2% shareholding. The local company in turn holds a significant interest in a major supplier of commodities to the applicant (presumably through the branch).

From time to time the branch therefore receives dividends in respect of its 2% shareholding in the local company, and in principle, dividends tax needs to be withheld on such dividends

Section 64G(3) of the Income Tax Act No 58 of 1962 (Act) provides that a company paying a dividend may reduce the rate at which dividends tax is withheld in accordance with an applicable double taxation agreement, provided that the beneficial owner of the dividend submits the relevant declaration and undertaking to the company paying the dividend.

Article 10(2) of the double taxation agreement between South Africa and Japan (DTA) provides for such a reduction of the dividends tax rate to 5% in circumstances where the beneficial owner (being a company) holds at least 25% of the voting shares in the company paying the dividend.

However, in terms of Article 10(4) of the DTA, this reduced rate does not apply to a beneficial owner that carries on business in South Africa through a permanent establishment and the shareholding in respect of which the dividends are paid 'is effectively connected with such permanent establishment'. 

The question that arises is therefore whether the 2% shareholding of the local branch of the applicant is 'effectively connected' to its permanent establishment in South Africa.

SARS ruled that, based on the particular facts, the branch’s 2% shareholding in the local private company is not effectively connected to the branch and Article 10(4) does therefore not apply. The applicant (and the branch) may therefore rely on the provisions of s64G(3) of the Act and Article 10(2) of the DTA in order to the reduce the rate of dividends tax in respect of dividends paid on the full 49% shareholding, inclusive of the 2% held by the branch.

Unfortunately the ruling is not entirely clear as to SARS’s reasoning, but it appears that, since the 2% shareholding of the branch related to the procurement or purchasing of goods in South Africa from the local supplier company, Article 5(4) of the DTA excluded or disconnected the 2% shareholding from any permanent establishment of the applicant.



Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.

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