In­come tax is­sues of loans by non­res­i­dents

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW -

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.

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