How would an offshore dividend be taxed? My mother receives a dividend from a regularised offshore company. Is dividends tax at 20% then taxed at your marginal tax rate of say 40%?
The short answer is yes, you are correct. Most foreign dividends received by individuals from foreign companies are taxable at a maximum effective rate of 20% via the normal tax system. Your mother is obliged to declare her foreign investments and any earnings (interest or dividends) when she completes her provisional tax forms.
If your mother is a foreign resident, she may be eligible for a reduced rate if there is a double taxation agreement in place between South Africa and her country of residence.
A few categories of foreign dividends are exempt from foreign dividend taxes, including the following:
- Dividends declared by non-resident listed companies which are also listed on the JSE, provided that more than 10% of the total equity share capital in that listed company is at the time of the declaration of that foreign dividend held collectively by the shareholder/taxpayer.
- Dividends declared by a foreign company where the shareholder/taxpayer is a resident who owns at least 20% of the total equity share capital and voting rights in that company declaring the dividend.
- The Income Tax Act also makes provision for the exemption from normal tax of other foreign dividends received by or accrued to a resident shareholder/taxpayer, for example in specific circumstances where a South African connection is present or a controlled foreign company is involved.
Some background: before January 2011, foreign dividends were not taxed. With effect from January 2011, a definition of “foreign dividend” was introduced into the Income Tax Act. The combination of this definition, as well as existing definitions for the words “foreign company” and changes to the definition of “dividend”, had the result that foreign dividends no longer fell within the definition of “dividend”. According to the South African Revenue Service (Sars), therefore, the definitions ensured that a “dividend” and a “foreign dividend” were mutually exclusive.
With effect from 2012, tax laws were amended to ensure that the maximum effective rate of tax on taxable foreign dividends did not exceed the dividends tax rate applicable to local dividends. With effect from years of assessment commencing on or after March 1 2017, the maximum effective rate of tax on taxable foreign dividends increased from 15% to 20%.
This is different to the requirements for the taxation of South African dividends, where a dividends tax of 20% is imposed on shareholders in the form of a withholding tax; the tax is withheld and paid to Sars by the company paying the dividend. Exceptions to this include scenarios where a ‘regulated intermediary’ (like a stockbroker, unit trust company or linked investment service provider) pay the tax on your behalf.
In the case of both local and foreign dividend payments, the person entitled to the dividend is the person liable for the tax. No deductions are allowed for expenditure incurred to produce either foreign or local dividends.