South Africa’s withholding tax system mainly affects payments that cross the country’s borders. Businesses dealing with overseas shareholders, lenders, intellectual property owners and other non-resident recipients therefore need to understand when tax must be deducted before a payment is released.
For payments made to South African residents, withholding tax has a relatively limited reach. Dividends are the main category affected, although dividends distributed to South African resident companies are generally exempt from dividends tax.
Dividends Paid to Overseas Shareholders
Dividends can create a withholding obligation when they are paid to non-residents. The standard dividends withholding tax rate is 20%. This generally applies when a South African resident company distributes dividends to a foreign beneficial owner.
The rules can also extend to dividends paid by a foreign company where the relevant shares are listed on a South African exchange.
In most situations, the company making the payment or an appropriate regulated intermediary deducts the tax. The liability ultimately rests with the beneficial owner receiving the dividend. Different treatment may apply where dividends are distributed in assets rather than cash.
Interest Payments to Non-Residents
Interest flowing from a South African source to a foreign recipient can attract withholding tax at 15%. The rule applies to qualifying interest arising from certain debt arrangements.
This means a South African business paying interest abroad should determine the tax position before transferring the full amount. The resident payer is generally responsible for deducting the applicable withholding tax.
Treaty provisions may, however, change the final rate. Companies should therefore avoid assuming that every international interest payment automatically carries the domestic 15% rate.
Royalties and Intellectual Property
South Africa also imposes a 15% withholding tax on qualifying royalties and know-how payments made to non-residents. The rules cover payments associated with the use, or right to use, intellectual property in South Africa.
Consider a Johannesburg manufacturer that pays an overseas company for permission to use specialised production technology. If the arrangement falls within the royalty rules, the South African payer may need to deduct withholding tax before remitting the balance overseas.
Unlike some other withholding arrangements, this tax generally represents a final tax for the foreign recipient.
Payments for Services
Ordinary service fees paid to non-residents are treated differently. South Africa does not currently impose a domestic withholding tax simply because a service fee is being paid to an overseas supplier.
Businesses should still classify transactions carefully. A payment described commercially as a service fee could contain elements relating to intellectual property or another category with different tax consequences.
How Tax Treaties Can Change the Rate
South Africa maintains tax treaties with numerous countries. These agreements can reduce the withholding tax that would otherwise apply to dividends, interest or royalties.
Without treaty relief, the principal domestic rates covered here are 20% for dividends and 15% for qualifying interest and royalties. A treaty may provide a lower ceiling depending on the recipient’s country, beneficial ownership and other conditions.
Rates can also depend on shareholding levels. A foreign corporate shareholder with a qualifying ownership stake, for example, may receive different dividend treatment from a smaller investor. Businesses should therefore examine the particular treaty rather than relying on a general international rate.
South Africa’s tax treaty framework has also been affected by the Base Erosion and Profit Shifting Multilateral Instrument. South Africa ratified the instrument in September 2022, and it entered into force domestically on 1 January 2023. Its provisions can modify certain covered tax agreements.
Visiting Entertainers and Sports Professionals
Special withholding rules apply when foreign entertainers or sportspersons earn income from activities performed in South Africa.
Payments connected with those South African activities are generally subject to withholding tax at 15%. Event organisers and other businesses making these payments should therefore establish the recipient’s residency and the nature of the engagement before settling the amount.
Property Sales by Foreign Owners
Withholding tax can also arise when a non-resident disposes of immovable property situated in South Africa.
The applicable withholding rate depends on the seller. A purchaser must generally withhold 7.5% where the foreign seller is an individual, 10% where the seller is a company and 15% where the seller is a trust.
However, this withholding requirement does not apply where the amount payable is below ZAR 2 million.
Importantly, the deduction is not the seller’s final tax bill. It operates as an advance payment toward the non-resident seller’s normal South African income tax liability. The seller must still submit the appropriate income tax return for the year in which the property was disposed of.
Building a Practical Compliance Routine
For businesses, good withholding tax compliance starts before money leaves the account. Finance teams should identify the recipient’s tax residence, determine the real nature of the payment and establish whether domestic withholding rules apply.
Where a tax treaty is relevant, the business should verify whether the recipient qualifies for the reduced rate and whether supporting documentation is required. Records should also be maintained to explain how the applicable tax treatment was determined.
Taking these steps early can make cross-border payments easier to manage and reduce the risk of applying an incorrect withholding rate.
Frequently Asked Questions
What is the withholding tax rate on dividends paid to non-residents?
The standard rate is 20%, although an applicable tax treaty may reduce the amount payable.
How is interest paid to non-residents taxed?
Qualifying interest from a South African source is generally subject to a 15% withholding tax, unless treaty relief or another exemption applies.
Read Also: South Africa VAT Guide: Registration Thresholds, Vendor Obligations, Refunds and Compliance Rules
Are royalties paid overseas subject to withholding tax?
Yes. Qualifying royalties and know-how payments to non-residents generally attract withholding tax at 15%.
Does South Africa withhold tax on ordinary service fees paid abroad?
No domestic withholding tax generally applies to ordinary service fees paid to non-residents. Businesses should still classify payments correctly.
Can a tax treaty reduce South African withholding tax?
Yes. South Africa has treaties with numerous countries that may lower the applicable rates for dividends, interest and royalties when the required conditions are satisfied.
How are non-resident entertainers and sportspersons taxed?
Payments relating to activities they perform in South Africa are generally subject to withholding tax at 15%.
What happens when a non-resident sells South African property?
The purchaser may have to withhold 7.5% for an individual seller, 10% for a company or 15% for a trust.
Does property withholding apply to every sale?
No. The withholding requirement does not apply when the amount payable is below ZAR 2 million.
Is property withholding the seller’s final tax?
No. The amount withheld is treated as an advance toward the non-resident seller’s normal tax liability. The seller still needs to file an income tax return for the relevant year.