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Interest Exemption for Non-Residents
The draft Taxation Laws Amendment Bill proposes to amend the interest exemption contained in the Income Tax Act, as well as the interest withholding tax provisions. Both of which will come into effect on 1 January 2013. Taxand South Africa explores the implications of these amends for non-resident taxpayers.
In terms of the proposed amendments, this exemption will only apply to interest income which is not subject to the interest withholding tax. The amendment will apply to any interest which is paid, or becomes payable, from 1 January 2013 (irrespective whether such interest may have been accrued to the taxpayer before that date).
The effect of the above amendment is that if the interest received by or accrued to a non-resident is subject to the withholding tax, it will be exempt from income tax. Conversely, if the interest is exempt from the withholding tax it will be subject to income tax.
As such, should an amount of South African sourced interest paid to a non-resident be exempt from the interest withholding tax, then such interest income will not be exempt from South African income tax.
In particular, the interest will be derived from a South African source in the hands of the non-resident recipient. Therefore they will be liable to tax, subject to a reduction of the South African income tax liability under an applicable DTAA.
As an important gateway into the African marketplace, many multinationals will conduct business in South Africa and therefore will be classed as non-residents. The amendments in interest exemption are important to note, however as a company will either be taxed in the area of income tax or interest withholding tax, it will vary in each individual case which is prefarable to the company.