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Taxation of Dividends to Increase
It was announced in the 2012 budget speech of the Minister of Finance, on 22 February 2012 that the taxation of dividends will be increased from the current 10% secondary tax on companies ("STC") to a 15% dividend withholding tax with effect from 1 April 2012. Draft legislation confirming this proposal has now been released. Taxand South Africa discusses the contents of the draft legislation to ascertain the main points multinationals should watch out for.
The transition from STC to dividends tax has brought about changes in respect of, amongst others, deemed dividends. Under the STC regime, the general principle is that a loan granted by a company to a shareholder or a connected person in relation to the shareholder is deemed to be a dividend which is subject to STC at a rate of 10% calculated on the principal amount of the loan, subject to certain explicit exemptions.
The concept of "value extraction" was initially intended to replace the current deemed dividends rules under the STC regime. The tax would be triggered when any form of value was extracted from a company for the benefit of connected persons in relation to the paying company. Value extraction tax was scheduled to come into effect together with dividends tax.
The above new deemed dividends provisions come into operation when the new dividends tax provisions come into operation. Such date has been determined by the Minister of Finance as 1 April 2012. Dividends tax only applies to dividends declared and paid after 1 April 2012. The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2011 (dated 27 January 2012) provides that the deemed dividend provisions will only apply to distributions received or accrued on or after 1 April 2012.
Some important differences between the STC and dividends tax regimes have been illustrated above. It may be important, especially in the transitional period, to determine under which regime a loan will fall in order to determine the triggering of a deemed dividend.
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