A surprise announcement included in the Budget Speech is that the withholding tax on dividends will be introduced, from 1 April 2012, at 15% and not at the originally announced rate of 10%. Royalty withholding tax will be increased from 12% to 15%. Interest withholding tax will also be introduced on 1 January 2013, not at the originally announced rate of 10%, but at 15%. This undoubtedly increases the importance of treaties for foreign investors in South Africa, as many treaties will reduce the withholding taxes on dividends to 5% and interest and royalties to 0%, provided that the requirements of the treaties are met.
A positive announcement is that certain loans from South African companies to foreign (African) subsidiaries will be treated as equity in nature. South African groups that set up operations in other African countries often take many years before their foreign operations become profitable. Commercially, it does not make sense to charge interest on loans to loss making operations. However, failure to charge interest creates the risk of transfer pricing adjustments in South Africa. If the loans are treated as equity in nature, it will allow for interest free loans to be made, in particular during start-up phases, which is certainly positive news for these groups.
The headquarter company regime was introduced in January 2011 to promote South Africa as a gateway into Africa. Since it was announced and the first version of the legislation governing the regime was introduced, there have been many amendments, mostly positive, to make the regime more attractive to foreign investors. A further positive development, is the announcement by the Minister of Finance that the legislation will be refined to deal with issues faced by headquarter companies that trade in foreign currencies and also to deal with transfer pricing issues faced by these companies.
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