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Foreign dividend exemption to be limited to equity shares

South Africa
South African residents are required to include in their gross income any amount received or accrued by way of a foreign dividend. “Foreign dividend” is defined in the Income Tax Act (Act) and essentially refers to the meaning of a foreign dividend within the relevant jurisdiction of the foreign company declaring the dividend. Taxand South Africa explores the definition of a foreign dividend.

Therefore, foreign dividends are taxable in the hands of South African companies, unless exempt in certain circumstances. In particular, it is noted that foreign dividends may be exempt from tax in terms of section 10B of the Act which provides for the so-called “participation exemption”.

The participation exemption in section 10B(2)(a) of the Act provides that foreign dividends are exempt from tax where the person who received or accrued a foreign dividend holds (whether alone or together with any other person forming part of the same group of companies), at least 10% of the total equity shares and voting rights in the company declaring the dividends, subject to certain exclusions.

The participation exemption has recently been amended to exclude foreign dividends from shares other than “equity shares”. An “equity share” is defined in section 1 of the Act as any share in a company excluding any share that, neither as respects dividends nor as respects returns of capital, carries any right to participate beyond a specified amount in the distribution.

Previously, South African companies which held at least 10% of the equity shares and voting rights in a foreign company as well as preference shares would have qualified for the participation exemption in respect of the dividends declared on the preference (and ordinary) shares. Therefore, the participation exemption applied to all shares as long as the South African company held 10% of the equity shares and voting rights.

The legislators have indicated that it was always intended that the participation exemption should apply only to foreign dividends received from equity shares.

The amendment applies with effect from 1 April 2014 in respect of foreign dividends received or accrued after that date. 

Your Taxand contacts for further queries are:
Bernard Du Plessis
T. +27 11 269 7891

Lavina Daya
T. +27 21 410 2500


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Taxand's Take

In summary, the participation exemption will no longer apply to foreign dividends that have been received or accrued in respect of a share other than an equity share (such as a preference share) even though the recipient holds 10% or more of the equity shares and voting rights of the foreign company declaring such dividend. .

Therefore, foreign dividends arising on preference shares (and any other shares which do not constitute “equity shares”) which are received by South African companies on or after 1 April 2014 will not qualify for the participation exemption. Multinationals should review structures where non equity shares are held to seek more tax efficient alternatives. 

Taxand's Take Author

Bernard Du Plessis
Taxand Board member
South Africa
Sub-Saharan Africa

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