SOUTH AFRICA Law and Practice Contributed by: Ulrike Naumann, Alison Mellon, Joshua Janks and Aneria Bouwer, Bowmans
claw-back rules which could apply in acquisi- tion finance transactions in South Africa.
African government, a South African bank or in respect of any listed debt. 8.3 Thin-Capitalisation Rules South African transfer pricing provisions are contained in the Income Tax Act 1962 (ITA) and incorporate thin-capitalisation rules. The transfer pricing provisions are generally in accordance with the guidelines of the OECD and apply only to affected transactions. Affected transactions, broadly speaking, refer to cross-border transac- tions between connected persons (or associated enterprises with effect from 1 January 2023), and in respect of which any term or condition is not arm’s length. In the event that such a term or condition results or will result in a tax benefit for any person that is a party to the transaction, then the taxable income of or tax payable by the person that derives the tax benefit has to be calculated as if the transaction was concluded on arm’s length terms and conditions. In the past, a 3:1 loan funding to equity ratio was regarded as acceptable in terms of thin-capital- isation guidelines (the so-called “safe harbour” provisions). However, with effect from 1 April 2012, the general transfer pricing (arm’s length) provisions are applied to determine whether a company is thinly capitalised. The safe harbour provisions thus can no longer be relied upon to determine an acceptable debt-to-equity ratio. On 17 January 2023, the South African Revenue Service (SARS) released Interpretation Note 127 (Determination of the taxable income of certain persons from international transactions: intra- group loans) (IN127), which applies to loans advanced in years of assessment commencing on or after 1 April 2012.
8. Tax Issues 8.1 Stamp Taxes
South Africa does not impose stamp taxes. 8.2 Withholding Tax/Qualifying Lender Concepts South Africa imposes withholding taxes on inter alia dividends (dividends tax) and interest (inter- est withholding tax) at a rate of 20% and 15% respectively. The foreign person is responsible for the tax, but it must be withheld by the person making the payment to or for the benefit of the foreign person. In both instances, a non-resident recipient may be able to rely on a reduced rate in terms of a double tax agreement (DTA). A non-resident party relying on a reduced rate must submit a declaration and undertaking to the South African person making payment. The declaration and undertaking must be submitted before payment of such amount is made, and are valid for five years from the date of the declaration. Dividends tax is levied on dividends declared by domestic companies, and non-resident compa- nies listed in South Africa. Dividend payments to domestic retirement funds, public benefit organisations (PBOs) and domestic companies, among others, are exempt. Dividends tax is rel- evant where the acquisition finance transaction includes equity financing. Interest withholding tax is levied on the cross- border payment of interest to or for the benefit of “foreign person” . There are various exemptions, including in respect of interest paid by the South
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