Income tax issues of loans by nonresidents
THIS article examines some of the pertinent South African income tax issues arising from interest-bearing loans advanced by a nonresident to a South African resident entity.
Exemption from standard tax for the lender
Section 10(1)(h)(ii) of the Income Tax Act exempts any amount of interest received by or accrued to any nonresident from tax unless the debt from which the interest arises is effectively connected with a permanent establishment of that nonresident in SA.
Therefore, a nonresident lender should be exempt from income tax in respect of interest arising on debt advanced to a South African resident borrower, provided such interest is not effectively connected with a permanent establishment of the nonresident lender.
Interest-withholding tax for the lender
The interest-withholding tax is payable at the rate of 15% in respect of interest that is paid by any person to, or for the benefit of, a foreign person, to the extent that the interest is regarded as having been received or accrued from a source in SA.
In terms of section 50C of the act, the nonresident lender will be liable for the amount of interestwithholding tax. However, in terms of section 50E(1) of the act, the South African borrower who makes payment of such interest to the nonresident lender will be required to withhold the interest-withholding tax from the payment of such interest.
The withholding rate of 15% must, in terms of section 50E(3), be reduced if the interest is subject to a reduced rate of tax as a result of the application of a double tax agreement.
In terms of section 50F(2) of the act, any person who withholds any withholding tax on interest in terms of section 50E must submit a return and pay the tax by the last day of the month following the month during which the interest is paid.
There are various exemptions from the interest-withholding tax. These apply to interest paid to a nonresident by a bank.
South African tax implications in relation to interest expenditure
In terms of sections 31(2) and 31(3) of the act where, for example, a transaction is entered into between a person who is a resident and any other person who is not a resident and those persons are connected persons in relation to each other, it should be ensured that the terms of the loan including the rate of interest are arm’s length.
South African entities should note implications
Peter Dachs and Bernard du Plessis are directors and joint heads of ENSafrica’s tax department.