Dividends tax, withholding and treaties: what leaves when profits leave
At a glance
What it is: A tax on dividends paid by a South African company — collected by withholding
Standard rate: 20% of the dividend, withheld by the company and paid to SARS
Reduced by treaty: If the shareholder is in a treaty country, a lower rate may apply
Who claims it: The shareholder, usually through a declaration to the company
The 2012 shift: Dividends tax replaced STC — the mechanics, and who is liable, changed
What it is
When a South African company declares a dividend, tax usually comes off before the money leaves. This is dividends tax — in substance a tax on the shareholder, but collected by the company. For a foreign shareholder, the headline rate can be reduced under a double tax treaty, but only if the paperwork is done.
The important point: a treaty benefit is not automatic. Without the declaration and records, the company must withhold at the full rate.
Who this affects
Companies declaring dividends
The company is the withholding agent. It must know each shareholder's status, or it will withhold too much — and the shareholder may not be able to recover it easily.
Foreign shareholders
If a treaty reduces the rate, the shareholder must be able to show it is the beneficial owner and qualifies for the benefit under the relevant treaty.
Questions to ask first
Is there a double tax treaty between South Africa and the shareholder's country?
What rate does that treaty actually allow for dividends?
Can the shareholder prove beneficial ownership and treaty residence?
Is the payment a dividend, or could it be treated as something else?
Have the exchange-control and bank steps been lined up as well?
How a dividend is paid over
1. Declare the dividend in line with the Companies Act.
2. Establish each shareholder's tax status and treaty position.
3. Obtain the declarations needed for any reduced treaty rate.
4. Withhold dividends tax at the correct rate, and pay it to SARS by the due date.
5. Line up the exchange-control and bank steps for the remittance.
Common mistakes
Assuming a treaty rate applies without providing the declaration.
Treating a distribution as a dividend when it is really a return of capital or a loan repayment.
Over-withholding, then struggling to refund the shareholder.
Missing the interaction with exchange control when the money is remitted.
Related
Sources
Income Tax Act, sections 64D to 64N (dividends tax)
SARS: dividends tax and double tax agreement guidance
Paying dividends to a foreign shareholder?
We can check the treaty position and prepare the declarations so the right rate is withheld.
