On 17 April 2026, National Treasury and the South African Reserve Bank published the long awaited draft of the replacement to the Exchange Control Regulations, 1961 – the Capital Flow Management Regulations.

The joint media statement  states that the “amendments signal South Africa’s readiness to modernise and adopt a ‘positive bias’ approach to managing cross-border capital flows through fewer transaction pre-approvals, a focus on reporting, the surveillance of high-impact and high-risk crossborder transactions, and the combating of illicit financial flows“.

This is truly a remarkable statement given that the draft regulations largely reflect the current Exchange Control Regulations.

The main differences between the old Exchange Control Regulations and the new Capital Flow Management Regulations are:

1. Inclusion of crypto assets as “capital”, and an expansion of the definition of “capital” generally to include anything of a monetary value except immovable property;
2. Imposition of regulatory obligations on authorised crypto asset service providers;
3. A prohibition on all dealings in crypto assets between residents and non-residents, and a prohibition on dealing in crypto assets generally beyond an unspecified monetary threshold, except where the counterparty is an authorised crypto asset service provider;
4. Increased powers of enforcement;
5. An express provision to impose administrative sections on authorised dealers in foreign exchange and on authorised crypto asset service providers;
6. Inclusion of a framework to formalise exemptions from the draft regulations; and
7. Providing clarity on the criteria and process for regularising non-compliance with exchange controls generally.

Draft regulation 30 deserves special mention as a disappointment. It deals with the regularisation of non-complaince with exchange controls. As is the case with the current Regulation, it requires National Treasury or an authorised person to publish a notice of the types of contraventions that may be regularised. Therefore, the uncertainty regarding when the South African Reserve Bank will accept applications for regularisation of non-compliance or the penalty thresholds, persists.

Another disappointment is the treatment of Crypto assets. The draft regulations do not provide any insight in respect of the treatment of persons who already hold crypto assets acquired in Rand locally or abroad using their authorised foreign funds. These individuals could be subject to significant restrictions on how they buy and sell crypto assets going forward.

The nature of the Exchange Control Regulations currently follows a so-called negative bias approach where all transactions involving foreign exchange, transactions with non-residents and exports of capital are prohibited unless otherwise provided by National Treasury or the Financial Surveillance Department of the South African Reserve Bank (“FinSurv“). Contrary to what National Treasury and the South African Reserve Bank have said the negative bias approach of the Exchange Control Regulations has been carried across to the draft regulations.

Many of these exemptions from the current Exchange Control Regulations are published by FinSurv in circulars and then included in the Currency and Exchanges Manual for Authorised Dealers, which can be found on the South African Reserve Bank’s website. It is expected that the current exemptions will have to be formalised under the new draft regulation 23.

The final regulations will be published after taking into account any comments and National Treasury and FinSurv  will then publish the exemptions to the regulations. The exemptions are currently being considered and are not yet available for comment. It is only once these exemptions are published that we will know if national Treasury and the South African Reserve Bank are serious about modernising the exchange control framework and adopting a positive bias approach to regulating foreign exchange transactions. For now, we can only conclude that the current negative bias approach to exchange controls will remain in the new Capital Flow Management regulations.

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On 26 November 2025, SARS published a Draft Interpretation Note titled “Loan, advance, or credit granted to a trust by a connected natural person” (“Draft IN”). The Draft IN clarifies the meaning and scope of section 7C of the Income Tax Act No. 58 of 1962 (“the Act”).

Overview Of Section 7c

Section 7C is an anti-avoidance provision that targets the use of low-interest and interest-free loans provided by resident persons to trusts as a means of transferring wealth free of tax. The policy rationale is to compensate the fiscus for the estate duty that would otherwise be forgone, as the assets transferred to the trust would fall outside the lender’s estate at the date of death.

Prior to the introduction of section 7C, wealthy individuals used interest-free or low-interest loans to fund the shift of assets out of their personal estates into trust structures, either by advancing cash or selling assets to trusts on loan account. This practice eroded South Africa’s tax base by facilitating the transfer of growth assets to local and offshore trusts, thereby freezing the value of the lender’s estate at the loan amount, avoiding income tax on forgone interest, and circumventing donations tax, as the transfers were structured as loans rather than outright dispositions.

Section 7C applies when a resident natural person, or a company connected to that natural person, provides a loan, advance, or credit — directly or indirectly — to a local or foreign trust that is connected to that natural person. It also applies where such funding is provided to a company in which that trust, alone or together with its connected persons, holds at least 20% of the equity shares or voting rights.

If no interest, or interest below the “official rate of interest’, is charged on the loan, the difference between the actual amount of interest incurred by that trust or company in respect of that loan and the amount that would have been incurred if the “official rate of interest” were applied is treated as a donation made to that trust or company by the lender. The forgone interest is deemed to be an annual donation for so long as the loan remains outstanding.

The “official rate of interest” for loans denominated in Rands is the Reserve Bank’s repo rate plus 100 basis points (currently 7.75%), while for loans denominated in foreign currency, it is the equivalent of the South African repo rate in that foreign currency plus 100 basis points.

Donations tax is payable only by South African tax residents. The donor is liable for donations tax at a rate of 20% on cumulative donations of up to R30 million, calculated from 1 March 2018, and at 25% thereafter. However, the taxpayer may use his or her R200,000 (previously R100,000) annual donations tax exemption to reduce the amount of the deemed donation under section 7C.

Loans, advances, or credit are excluded from section 7C in the following circumstances: the funding is used by the trust to purchase or improve the primary residence of the lender or the lender’s spouse, provided that the residence is used mainly for domestic purposes; the loan is interest-free in accordance with Sharia-compliant financing; or the funding is provided in exchange for a vested interest in the trust’s assets that the trustees cannot vary.

Draft Interpretation Note

Although SARS’s Interpretation Notes are not binding on taxpayers or the courts, the Draft IN provides insight into SARS’s planned interpretation and application of section 7C, as it defines certain key terms that are not defined in the Act. Moreover, once published, the Draft IN will give rise to a “practice generally prevailing” as contemplated in section 5 of the Tax Administration Act No. 28 of 2011, which means that if a taxpayer is assessed in accordance with that practice, the assessment cannot be reopened should SARS subsequently change its view.

“Loan, advance or credit”

The Draft IN broadly interprets the phrase “loan, advance or credit” to mean any form of financial assistance provided by a connected person to a trust on an interest-free or low-interest basis. Whether a donation has been made is determined objectively by comparing the charged interest rate to the “official rate of interest”. Whether the person subjectively intended to make a donation is irrelevant.

“Connected person”

In terms of section 1 of the Act, a natural person’s relatives, and any trust that the person is a beneficiary of, are “connected persons” to that natural person. The Draft IN reiterates that only a natural person’s parents, children, grandparents or siblings will be “connected persons” to that natural person for purposes of section 7C.

“At the instance of”

The loan is not limited to one made by the taxpayer personally but extends to a company that is a connected person and that makes a loan at the instance of the taxpayer. The Draft IN states that the phrase “at the instance of” requires that the funding must (i) be made at the request or under the influence of a connected person to the trust, and (ii) result in a transfer of wealth from that connected person to the trust.

The Draft IN is clear that the person who initiates the loan must also be the one to extend it. The question arises, however, as to the consequences where more than one person has instigated the funding.

Section 7C(4) clarifies the consequences for multiple initiators in the context of companies. If a loan, advance or credit is provided by a company at the instance of more than one connected person, each connected person is deemed to donate an amount in proportion to each of their shareholding in the company relative to the total shareholding of those connected persons.

“Provide”

The Draft IN states that the word “provide” implies a conscious decision rather than mere acquiescence. This interpretation is important in the context of discretionary trusts.

If a beneficiary of a trust provides a low-interest or interest-free loan to the trust that is payable on demand, the beneficiary’s decision not to demand repayment is obviously a conscious decision, and this amount will constitute a loan, advance or a credit for purposes of section 7C.

However, the trustees of a discretionary trust may unanimously elect either to retain undistributed income and capital in the trust or to make distributions to a beneficiary. When the trustees decide to allocate amounts to a beneficiary, those amounts vest in the beneficiary and are credited to the beneficiary’s loan account.

If the trust deed goes on to state that those vested amounts may not, at the trustees’ discretion, be distributed to the beneficiary but must rather be retained in the trust and administered on the beneficiary’s behalf until the trustees decide to release the funds, such amounts will not qualify as a loan, advance, or credit, and section 7C will not apply.

Likewise, if the trustees, at their sole discretion as provided for by the terms of the trust deed, refrain from paying the vested amounts to the beneficiary, such amounts will not constitute loans, advances, or credit, and section 7C will not find application.

A beneficiary of a discretionary trust cannot be said to have made a conscious decision to provide a loan to the trust if the trust deed provides, or the trustees unanimously decided that certain amounts must vest in the beneficiary but not be paid. The Draft IN confirms that it is only where a beneficiary decides or instructs the trustees to refrain from paying the vested amounts that the beneficiary will be deemed to have made a conscious decision to loan the trust an amount.

Calculation of interest

The Draft IN clarifies that the amount of forgone interest is calculated daily on the basis of simple interest. Furthermore, as the in duplum rule does not apply, the total amount of interest that may accumulate on the loan is not limited to the outstanding principal debt.

When a new repo rate or equivalent rate is determined, the new rate of interest will apply from the first day of the month following the date on which the new repo rate or equivalent rate came into operation.

The aggregate of the daily interest differential calculated during the year of assessment is deemed to be a donation on the last day of the year of assessment of the trust or company that is the borrower. In the case of trusts, this will typically be the last day of February of each year, which means that the lender must pay the donations tax by the end of March.

Affected transaction in terms of section 31

Section 7C does not apply to a low-interest or interest-free loan to the extent that the loan is subject to the transfer pricing rules contained in section 31 of the Act.

Under these rules, a lender to a non-resident connected person is deemed to earn interest charged at a market-related rate. In addition, there is the so-called secondary adjustment, so that a lender who is a natural person will also be deemed to have made a donation equal to the amount of the interest not charged. This means the amount could be subject to an effective tax rate of as much as 65% or 70% when both income tax and donations tax are taken into account.

In terms of the example contained in SARS Interpretation Note No. 127, titled ‘Determination of the taxable income of certain persons from international transactions: intra-group loans’ (issued on 17 January 2023), an arm’s length interest rate means the rate of interest that a financial institution would have charged on the loan. It is therefore possible that the “official rate of interest” and the arm’s length interest rate will not be equal.

As this could result in the same loan triggering a deemed donation under both provisions, section 7C provides that, to the extent a donation arises under section 31, no donation will be deemed to arise under section 7C.

Section 7(8) attribution rules

Although the Draft IN clarifies the relationship between section 7C and the transfer pricing rules, it is silent on its interaction with so-called attribution rules contained in section 7(8) of the Act.

Section 7(8) provides that any amount of income received by a non-resident as a result of any donation, settlement, or other similar disposition made by a resident will be attributed to, and taxed in the hands of, that resident. A similar provision in relation to capital gains is contained in paragraph 72 of the Eighth Schedule to the Act.

As the forgone interest on a low-interest or interest-free loan constitutes a donation, section 7(8) and paragraph 72 are triggered by a loan, advance, or credit provided as contemplated in section 7C. Accordingly, any income received by or accrued to, or any capital gain realised by, the non-‑resident borrower will be taxed in the lender’s hands at the lender’s marginal rate of tax — notwithstanding the fact that donations tax has already been charged on the forgone interest in terms of section 7C.

The Draft IN therefore confirms that if a resident extends low-interest or interest-free funding to an offshore trust or company, that loan will trigger both donations tax and income tax in terms of section 7C and section 7(8) of the Act. (As an aside, the Act does not specify what an acceptable interest rate would be to avoid attribution under section 7(8) and paragraph 72; SARS merely asserts that it must be a market-related rate. If a taxpayer were to apply the “official rate of interest” for attribution purposes as well, it seems difficult to see how a court would not agree with the taxpayer. After all, if the official interest rate multiplied by the loan constitutes a donation under section 7C, it is hard to conceive on what basis SARS could argue that a higher rate should be used for the attribution rules.)

Redeemable Preference Shares

There was previously a gap in the legislation, and taxpayers accordingly ceased funding trusts or underlying companies with interest-free loans, opting instead to finance them with zero-coupon or low-coupon preference shares. Section 7C was subsequently amended so that a preference share is now deemed to be a loan for the purposes of section 7C. Consequently, where relevant, the principles stated above apply equally to such preference shares.

Conclusion

The Draft IN foreshadows SARS’s broad interpretation of the meaning and scope of section 7C. It reduces the financial advantages of discretionary trusts, excludes the application of the in duplum rule, and confirms that a single transaction may trigger double or even triple tax consequences in terms of sections 7(8), 7C, and 31 of the Act.

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KEY TAX CHANGES

INTRODUCTION

On 25 February 2026, Finance Minister Enoch Godongwana delivered his fifth Budget Speech and his second under the Government of National Unity. This year, the Budget was delivered on time. We summarise below the key points most relevant to our clients.

The 2026 Budget marks a turning point for public finances. Government debt has more than tripled since 2008/09 but is set to peak at 78.9% of GDP this year before falling. The budget deficit continues to narrow from 5.1% of GDP in 2021/22 to 4.5% in 2025/26 and is projected to fall further to 2.9% by 2028/29.

The economy is forecast to grow by 1.6% in 2026, rising to 2.0% by 2028. Several factors support this outlook: the South African Reserve Bank’s new 3% inflation target; S&P Global’s credit-rating upgrade following South Africa’s removal from the FATF grey list; and energy-sector reforms, including no load-shedding since May 2025 and over 23,900 MW of private renewable energy investment secured.

The government’s economic plan has four pillars: maintaining stability through the lower inflation target; advancing energy, transport and telecoms reforms under Operation Vulindlela; strengthening state capacity to deliver services; and increasing infrastructure spending. The government recognises, however, that current growth is insufficient to reduce unemployment meaningfully or to expand public services.

The 2026 Budget brings good news for taxpayers. Notably, stronger-than-expected revenue collection enabled National Treasury to withdraw the R20 billion tax increase it had provisionally announced.

Personal and corporate income tax together account for more than 55% of total tax revenue, with personal income tax alone contributing nearly 40%. South Africa’s tax base is narrow: more than half of all personal income tax is collected from just 7.7% of taxpayers — those earning above R1 million per annum. The Government considers that raising personal income tax rates would be counterproductive, as higher rates encourage tax restructuring and yield less revenue than expected. Instead, it has adjusted tax brackets for inflation and raised thresholds to support small businesses. Its longer-term strategy is to broaden the tax base.

In addition to broadening the tax base, the long-term strategy continues to focus on improving taxpayer compliance. SARS has hired 1,500 new debt collectors, reducing overdue balances on payment plans from R14.6 billion to R6.8 billion. SARS has also registered 1.3 million new taxpayers, generating R4.9 billion in additional revenue, and has intensified action against illegal cigarette manufacturers. As at 31 January 2026, outstanding tax debt stood at R646 billion, of which R518.2 billion was undisputed. To recover more of this debt, SARS is working more closely with banks and hiring additional legal staff. Despite these efforts, SARS is unlikely to meet its collection targets, and no additional revenue from debt collection has been included in the fiscal projections.

On spending, the Budget focuses on infrastructure. The government plans to spend R1.07 trillion over the next three years on energy, water and sanitation, transport, health, education and housing. It has also raised R11.8 billion at favourable interest rates through its first infrastructure-specific government bond. On savings, the Targeted and Responsible Savings initiative has identified R12 billion in wasteful or ineffective programmes. A new Early Retirement Programme aims to attract younger workers to the public sector, with expected net savings of R5.5 billion over the medium term. A payroll audit has flagged more than 4,300 high-risk cases of possible payroll fraud.

The Budget reflects the tension between policy ambition and economic reality. The faster reforms deliver tangible results, the more credible they become, particularly as the government seeks to curb spending and reduce debt.

Overall, the 2026 Budget balances careful management of public finances with meaningful taxpayer relief. The decision to withdraw previously announced tax increases, together with inflation-linked adjustments and support for small businesses, is positive news for individuals and companies alike.

The Budget also proposes numerous amendments to fiscal legislation. This overview addresses those most relevant to our clients’ affairs. Draft legislation and consultation responses are expected in July 2026, with legislation to be introduced towards year-end.

Please contact us to discuss how these changes may affect your particular circumstances.

INDIVIDUALS

Personal income tax and CGT

After two consecutive years without inflationary adjustments, personal income tax brackets and rebates will be fully adjusted in line with the expected inflation rate of 3.4% for the 2026/27 year of assessment, providing meaningful relief across all income levels (though this will still not fully compensate for the loss in purchasing power since March 2023).

Key changes include:

• The entry threshold for income tax rises from R95,750 to R99,000 for taxpayers under 65, from R148,217 to R153,250 for those aged 65 and over, and from R165,689 to R171,300 for taxpayers aged 75 and over;
• All tax brackets have been adjusted upwards by 3.4%, with the top marginal rate of 45% now applying only to taxable income exceeding R1 878 600 (previously R1 817 000);
• Medical tax credits increase from R364 to R376 per month for the first two members, and from R246 to R254 for each additional member;
• For a taxpayer earning R500 000 per year, the adjustments result in annual tax savings of approximately R1 855. Lower- and middle-income earners benefit proportionally more from these changes.

In addition, the following adjustments are proposed:

• an increase in the tax-exempt limit on donations by individuals from R100 000 to R150 000 — the first such adjustment since 2007;
• an increase in the capital-gain exclusion on the disposal of a primary residence from R2 million to R3 million; and
• an increase in the annual CGT exclusion from R40 000 to R50 000.

Savings incentives

The annual contribution limit for tax-free investments rises from R36,000 to R46,000. However, the lifetime contribution limit remains unchanged at R500,000, meaning individuals who contribute the full annual amount each year will reach their lifetime limit sooner.

The annual retirement fund contribution deduction limit rises from R350 000 to R430 000.

Transfer of Assets Between Spouses

Relief on Transferring Allowance Assets

When a person disposes of a capital asset on which deductions have previously been claimed, the recouped deductions (up to the amount of the sale proceeds) are included in that person’s income in the year of sale. Where an asset is donated to a connected person, it is deemed to have been disposed of at market value, triggering a recoupment even though no proceeds are actually received. Section 9HB of the Income Tax Act provides a roll-over mechanism that allows spouses to transfer assets (trading stock, livestock or capital assets) without triggering a capital gain. However, this roll-over does not extend to recoupments: the donation of a capital asset to a spouse still triggers a recoupment in the hands of the transferor. It is proposed that section 9HB be amended to ensure tax neutrality by preventing recoupment on such transfers and by requiring the transferee spouse to assume the accumulated allowances previously claimed (so that the latter will pay, on any future sale, the tax that the donor up until now would have paid on donation).

Avoidance of Donations Tax and Income Tax

The section 9HB roll-over is expressly excluded for transfers of capital assets from a resident spouse to a non-resident spouse, because a non-resident is subject to CGT on only a limited category of assets. Without this exclusion, assets could be transferred outside the tax net free of tax. Instead, the resident spouse is deemed to receive proceeds equal to the asset’s market value and is subject to CGT on the deemed gain.

Donations tax (at 20%, or 25% on cumulative donations exceeding R30 million) is imposed on a South African resident donor regardless of the recipient’s tax residence. Donations between spouses are exempt from donations tax, irrespective of the recipient’s residence. When a person ceases to be a tax resident, that person is deemed to dispose of all worldwide capital assets at market value, triggering a capital gain. There is no equivalent deemed donations tax charge on cessation of residence.

National Treasury is concerned that spouses may avoid donations tax and CGT exit tax by staggering the cessation of their tax residence. According to National Treasury, Spouse A ceases to be tax resident first; Spouse B then donates all assets to Spouse A, benefiting from the spousal donations tax exemption and the CGT roll-over relief. Spouse B then ceases to be resident, with no deemed disposal for CGT exit-tax purposes. The proposed solution is to limit the spousal donations tax exemption to donations between resident spouses. As noted above, however, the CGT roll-over is already excluded for transfers to a non-resident spouse, and there is no deemed donations tax charge on cessation of residence. Accordingly, the donation of the assets to the non-resident spouse will be subject to CGT.  National Treasury’s assertion that these arrangements are “designed to avoid both donations tax and the income tax on cessation of residence” appears limited to the scenario of donating a high-growth asset when its value is at its lowest. It remains unclear how donations tax is avoided in these circumstances.

Employees’ tax for non-resident employers

Since 2024, non-resident employers operating from a fixed place of business in South Africa are required to register for PAYE.  An anomaly was identified: such employers were required to withhold employees’ tax (PAYE) from all South African resident employees, regardless of any connection to that fixed place of business. This rule is to be amended to limit the withholding obligation to remuneration paid to resident employees effectively connected to that fixed place of business in South Africa.

CORPORATES

Corporate tax rate

The 27% corporate income tax rate and the limitation on the use of assessed losses, both introduced for years of assessment ending on or after 31 March 2023, remain in place (though the Minister does recognise that South Africa’s tax rates remain high by international standards).

Small business and savings incentives

The Budget introduces substantial increases to thresholds that have remained unchanged for over a decade, providing support for entrepreneurs and encouraging savings. In addition to adjustments to the VAT registration thresholds (see below), the following changes are proposed:

• Turnover tax regime: The annual turnover limit increases from R1 million to R2.3 million, with significantly higher tax-free thresholds (the 0% bracket now applies up to R600,000, increased from R335,000).
• Capital gains tax exclusions: the lifetime small-business asset-disposal exclusion increases from R10 million to R15 million; and the exclusion for business owners aged 55 and over rises from R1.8 million to R2.7 million.

Withdrawing the proposal to align the two different interest limitation rules

Sections 23M and 23N of the Income Tax Act limit interest deductions to curb base erosion and profit shifting. Section 23M applies where the debtor is in a controlling or connected-person relationship with the creditor and the creditor is not subject to tax on the interest income (primarily, but not exclusively, aimed at non-resident lenders). Section 23N applies where debt is incurred to enable, facilitate or fund the acquisition of an asset by an acquiring company in a group reorganisation transaction, or of equity shares in an acquisition transaction.

The calculation of the interest deduction limit under both section 23M and section 23N refers to the “adjusted taxable income” of the debtor (section 23M) and the acquiring company (section 23N), but different formulae are applied.

The 2024 Budget proposed aligning the definition of “adjusted taxable income” and the formula in section 23N with those in section 23M. The result would have been that a lower deduction for interest would have been claimable under section 23N than was hitherto the case.

The effective date was set at 1 January 2027 to allow National Treasury and affected stakeholders time to consider the impact.

It is now proposed that this amendment be withdrawn on the basis that alignment is unnecessary, given the different nature of the rules and the transactions to which sections 23M and 23N respectively apply.

Extending the rehabilitation fund regime

Since 2006, mining companies have been able to deduct cash contributions to mining rehabilitation trusts, with income and gains in the trust exempt from tax. These trusts provide for post-closing environmental rehabilitation obligations. It is now proposed that this regime be extended to environmental rehabilitation trusts established for nuclear facilities, which are subject to similar rehabilitation obligations.

The practical uptake of this extension is uncertain, as mining rehabilitation trusts have largely fallen out of favour in the mining industry in favour of guarantee policies.

Collective Investment Schemes (CISs)

The disposal of assets held on capital account by portfolios of CISs is not subject to CGT by virtue of a specific exclusion. This exclusion does not, however, extend to the disposal by CISs of assets held on trading account, and there is no other exclusion for such disposals. It follows that profits derived by CISs from such disposals are fully subject to income tax in their hands (unless distributed to unitholders, which would then be so taxable).

The taxation of CISs was the subject of a National Treasury discussion document published in December 2024. That document noted that participatory interests in a portfolio are usually held as long-term capital assets and that this intention should govern the nature of receipts and accruals within the portfolio.

Following public consultation, the Budget indicates that a forthcoming response document from National Treasury will propose that all investment returns generated by regular CISs and retail investment hedge funds be taxed as capital gains. This measure is intended to encourage savings and provide certainty about the tax treatment of these vehicles. The response document has not yet been published but is expected to confirm this position.

By contrast, qualified investment hedge funds (QIHFs) are not open to the general public, have higher minimum-investment thresholds, and only cater to investors able to commit a minimum of R1 million. The government has indicated that it will propose excluding such QIHFs from the CIS tax regime. Instead, alternative tax treatment options for these funds will be outlined in the response document, providing tailored rules that reflect the different risk profile, investor base, and investment strategies of these funds compared to retail CISs.

This approach ensures that while retail investors benefit from simplified and predictable capital gains treatment, high-net-worth and professional investors in qualified hedge funds are subject to a tax regime more appropriate to their investment structure.

INTERNATIONAL TAX

Global Minimum Tax

South Africa will implement the global minimum tax rules in the 2026/27 fiscal year. These rules, designed to reduce profit shifting by multinational corporations, are expected to generate approximately R2 billion in additional revenue (revised downwards from an initial estimate of R8 billion). Companies within scope should review their structures and assess their compliance requirements.

Currency translation rules for a Domestic Treasury Management Company (DTMC) holding shares in a controlled foreign company (CFC)

South African exchange control rules allow a group to establish a single subsidiary, a DTMC, to hold the group’s foreign direct investments. The DTMC must be registered with the Financial Surveillance Department of the South African Reserve Bank (FinSurv) and must be a South African tax resident.

Among the tax benefits of a DTMC is the ability to select and transact in a functional currency. However, a DTMC is taxed in South Africa on its worldwide receipts and accruals.

Where a DTMC holds shares in a CFC, it must include the CFC’s net income in its taxable income calculation in Rand.

The CFC’s net income is determined in the CFC’s functional currency and then translated to Rand using the average exchange rate for the CFC’s foreign tax year ending during the shareholder’s year of assessment.

The interaction between the DTMC currency translation rules and the CFC net income inclusion creates onerous translation requirements: the CFC’s net income (in Rand) must first be translated back to the DTMC’s functional currency, and then the DTMC’s taxable income must be translated back to Rand. To resolve this, it is proposed that the CFC net income translation rules be amended so that the DTMC shareholder will be entitled to include the CFC income in its own income in foreign currency and then only translate its full and final taxable income in foreign currency to Rand.

Special Economic Zones

The government proposes relaxing the connected-party transaction rules for companies in special economic zones. Rather than disqualifying companies where more than one-fifth of transactions are with connected parties, the focus will shift to whether transactions are conducted at arm’s-length prices. This is a welcome development for businesses seeking to strengthen supply chains within these zones.

INDIRECT TAXES

VAT registration threshold

The compulsory VAT registration threshold increases from R1 million to R2.3 million with effect from 1 April 2026. This is the first adjustment since 2009 and will reduce compliance burdens for many small enterprises.

Time period to deduct notional input tax

Vendors acquiring second-hand goods from non-vendors may currently claim a notional input-tax deduction in any VAT period for up to five years after acquisition. This rule is to be amended to require the claim to be made in the tax period in which the supply takes place, subject to the existing five-year limit applicable to all input-tax claims.

Electronic services intermediaries

At present, VAT on electronic services rendered by a non-resident principal through an intermediary must be collected from the non-resident principal, unless the principal has agreed that the intermediary (being a vendor) will collect the VAT.

This default will be reversed: the intermediary will be liable for the VAT unless otherwise agreed, and even then will be jointly and severally liable with the non-resident principal for any unpaid VAT.

Excise Duties and Fuel Levies

Excise duties on alcohol and tobacco increase by 3.4% (in line with expected inflation) with effect from 25 February 2026. From the 2027 Budget onwards, excise duty adjustments will take effect on 1 April rather than on Budget Day.

With effect from 1 April 2026, the general fuel levy increases to R4.10 per litre for petrol and R3.93 per litre for diesel (below inflation). The carbon fuel levy rises to 19 cents per litre for petrol and 23 cents per litre for diesel, and the Road Accident Fund levy increases by 7 cents per litre. The combined increase remains in line with inflation.

NATIONAL ONLINE GAMBLING TAX

In November 2025, National Treasury published a discussion paper on a proposed national online gambling tax. Approximately R1.5 trillion was wagered in the South African gambling industry in 2024/25, with gross gambling revenue (GGR) of R74.5 billion — a 25.6% increase from 2023/24. The paper concludes that the current provincial tax regime is structurally inadequate for the rapid growth and cross-border nature of online gambling and proposes a uniform national tax of 20% on GGR, to operate alongside existing provincial taxes.

National Treasury emphasises that, although the proposed tax is expected to generate more than R10 billion, revenue generation is not its primary objective. The tax is framed as a corrective instrument aimed at internalising the social and economic harms of gambling and at aligning taxation with a technology-driven, cross-border environment. The public comment period closes on 27 February 2026. After reviewing submissions and engaging with stakeholders, National Treasury intends to incorporate revised proposals into draft legislation for further public comment later in the year.

TAX ADMINISTRATION

Reviewing the penalty regime for the underestimation of provisional tax

A provisional taxpayer who underestimates taxable income is subject to a 20% underestimation penalty where the second provisional tax estimate is less than 80% of the taxable income finally determined (or less than 90% where taxable income is R1 million or less). A 10% late-payment penalty applies where provisional tax payments are not made on time.

At present, the underestimation penalty cannot be imposed where the second provisional tax estimate falls within the 80%/90% window and is submitted on time but payment is late; only the lesser late-payment penalty applies. It is proposed, with effect from 25 February 2026, that the 20% underestimation penalty will also apply where the estimate is sufficient and submitted on time but payment is late. The legislation already contains rules to avoid duplication of the two penalties. (This means that the new rule will apply to second provisional payments due by the end of this week.)

It is also proposed that the R1 million threshold referred to above be increased to R1.8 million for years of assessment commencing on or after 1 March 2026.

Excluding certain exempt entities that are companies from the definition of “provisional taxpayer”

The definition of “provisional taxpayer” includes any company. This has the unintended consequence that entities fully or substantially exempt from income tax are classified as provisional taxpayers solely by virtue of being companies. It is proposed that fully exempt entities and certain partially exempt entities be excluded from this classification.

Permitting pre-or post-deposit screening of refunds by Banks

To curb fraudulent tax refunds, the Tax Administration Act allows banks to hold “suspicious” refunds and report them to SARS for investigation. To strengthen this measure, SARS and banks are exploring pre-screening of refunds before deposit into a taxpayer’s account. It is proposed that explicit legislative permission be granted for pre- or post-deposit screening of refunds by banks.

Interest relief in voluntary disclosure applications

In late 2024, the Constitutional Court held in Commissioner for the South African Revenue Service v Medtronic International Trading Sàrl that taxpayers applying for voluntary disclosure relief (from criminal prosecution, administrative non-compliance penalties and understatement penalties) were not entitled to seek remission of interest on the disclosed tax.

It is now proposed that the relevant tax Acts be amended, with effect from 1 March 2026, to allow taxpayers making voluntary disclosures to request remission of interest as part of their application.

EXCHANGE CONTROLS

Capital Flows Management Framework

The Exchange Control Regulations will be amended to regulate transfers of crypto assets (such as Bitcoin and Ethereum) to non-residents and to place crypto-asset service providers on a similar footing to authorised dealers with limited authority. Such providers will be required to authorise crypto-asset transfers within their clients’ exchange-control allowances and to report transfers to FinSurv.

Unfortunately there is still no news on the complete restructuring of the Capital Flows Management Framework that was announced several years ago.

Inward Foreign Loans

As part of efforts to attract foreign investment, the interest-rate cap on inward foreign loans is to be removed. At present, inward foreign loans are subject to a maximum interest rate of the base lending rate plus 3% (for foreign-currency-denominated loans) or prime plus 5% (for rand-denominated loans). Going forward, loans need only be at market-related rates and reported to the South African Reserve Bank. This change is possible given the increased regulatory limitation under the Income Tax Act on paying high interest rates to foreign lenders in order to avoid tax in South Africa, and SARS’s increased oversight of such arrangements.

Single Discretionary Allowance

The single discretionary allowance for private individuals doubles from R1 million to R2 million per calendar year, enabling South Africans to remit significantly more funds abroad without specific SARB approval.

Cross-Border Credit and Debit Card Transactions

The per-transaction limit for cross-border credit and debit card payments doubles from R50 000 to R100 000 in response to evolving digital-payment trends. This change is likely to have the greatest impact on businesses and consumers that regularly procure digital services or subscriptions from foreign providers.

Reducing the Capital Flows Regulatory Burden and Improving Competitiveness

At present, the HoldCo regime allows South African groups to incorporate a single DTMC with fewer foreign-exchange restrictions and a chosen functional currency. It is proposed that the DTMC concept be expanded to asset managers, enabling them to manage foreign-asset portfolios and trade foreign-currency-denominated financial instruments directly from South Africa.

TAX RATES AND THRESHOLDS

Individuals and special trusts

Personal income tax rate and bracket adjustments

Rebates

Tax threshold

Annual income tax payable and average tax payable comparison (taxpayers younger than 65):

Source:  National Treasury

Retirement fund lump sum withdrawal benefits

Retirement fund lump sum retirement benefits or severance benefits

Capital gains tax effective rate (%)

Capital gains exemptions

Corporate income tax rates

Income tax – Companies 

For the financial years ending on any date between 1 April 2025 and 31 March 2026, the following rates of tax will apply:

Tax regime for small business corporations

Income tax rates for trusts

Tax-free portion of interest

Transfer Duty

The transfer duty table affecting sales, and which applies to all types of purchasers, is as follows: 

Medical tax credits

You can download a PDF version of this update below:

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It has become common for businesses to implement loyalty programmes in order to incentivise their customers. These programmes allow customers to earn points by, for example, swiping their credit card, going to gym or making a purchase. Once the customers have accumulated enough points, they can redeem these points for discounts, free products or even cash. In this article, we consider whether SARS is entitled to a slice of the pie.

The starting point is to determine whether a person who earns rewards points should pay income tax on the value of these points, which will generally be the case if the points are revenue in nature (as opposed to capital in nature).

Broadly speaking, revenue is what a person earns through his work or wits, or the employment of his capital. Amounts which arise fortuitously, rather than being deliberately sought for and worked for, are regarded as capital in nature. For example, the recipient of a birthday gift is not liable for income tax thereon, because that gift was not sought for or worked for and is therefore capital in nature.

Whether the rewards points received by a customer are classified as capital or revenue will depend upon the facts. In most cases, rewards points are merely a perk – a welcome but incidental consequence of an activity which the customer would have performed regardless. In these situations, SARS would be hard‑pressed to argue that the points are the product of a revenue producing activity.

On the other hand, there are some cases where customers make a concerted effort to seek out customer loyalty programmes and tailor their shopping accordingly. Depending on the nature and extent of the customer’s activity, rewards points may be revenue in nature and subject to income tax if the customer has crossed the Rubicon and embarked upon a profit-making scheme involving rewards points.

If the rewards points earned by a customer are capital in nature, and therefore not subject to income tax, consideration should be given to whether these points could be regarded as capital assets which are disposed of when they are redeemed or cashed in, and if so, whether such disposal could give rise to tax.

In essence, a reward point is a personal right which the customer holds against the issuing company, entitling him or her to claim the relevant benefit. There are some cases where the disposal of a personal right will give rise to tax, for example, the sale of a share (which is nothing more than a bundle of personal rights which the shareholder holds against the relevant company). However, there are also many cases where the disposal of a personal right will not trigger tax. For example, consider the sale of a house. The seller disposes of his house in exchange for an agreed-upon purchase price, but before the seller gets the purchase price in cash, he gets a personal right against the purchaser to claim payment of the purchase price. When the purchaser makes payment, the seller exchanges his personal right for cash. If the latter transaction were to be treated as a tax event, the seller would have to disclose two disposals: (1) the disposal of his house and (2) the disposal of his right to claim payment. However, SARS acknowledges in its Comprehensive Guide to Capital Gains Tax that, in such a case, the extinction of the seller’s personal right against the buyer in exchange for the purchase price will not constitute a disposal of an asset for tax purposes.

Ultimately, when determining whether the disposal of a personal right will trigger tax in any given scenario, a common-sense approach should be adopted (see of Zim Properties Ltd v Proctor (1984) 58 TC 371, quoted by SARS with approval in its Comprehensive Guide to Capital Gains Tax). The question in this case is whether common sense dictates that, when rewards points are redeemed, there is no separate disposal of an asset which could trigger tax, or whether the better and more sensical analysis is that the accrual of rewards points and their redemption constitute two separate transactions.

Rewards points derive their value exclusively from the fact that they can be redeemed. This is an inherent characteristic which is embedded in the rewards points from inception. Without this quality, they would be useless or without value – in fact they would likely cease to exist. Simply put, rather than providing their holders with an income return or capital growth, rewards points mature into cash, or some other benefit, in accordance with their natural lifespan. On this basis, it could certainly be argued that the redemption of rewards points is not a separate tax event, but rather forms part of the same overarching transaction in terms of which the points accrue. To conclude otherwise may bring about a number of unintended and impractical results (for example, tax would be payable in respect of every “buy one get one free” deal).

Given the rising popularity of customer loyalty programmes, we encourage taxpayers to consider the tax implications of the receipt and redemption of rewards points and seek advice in this regard, lest they be caught unawares.

Read more about our Tax practice area.

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The tax dispute centred around the tax deductibility of raising fees incurred by the taxpayer when it financed and refinanced the acquisition of some of its business assets. As part of the funding arrangements, an entity within the lender’s group of companies charged a raising fee calculated as a percentage of the loan capital, which had to be paid in one lump sum as a pre‑condition for the lender advancing the loan capital.

The taxpayer claimed a deduction for the raising fees paid on the basis that they met the definition of “interest“, which includes any finance charges similar to normal interest. Taxpayers are eligible to claim a deduction for amounts which meet the definition of “interest” in section 24J of the Income Tax Act, 58 of 1962, even if the amounts are capital in nature, provided only that the expense is incurred in the course of carrying on a trade and in the production of income.

The definition of “interest” used to include finance charges “related” to interest, but this was amended to include only finance charges “similar” to interest. The amendment was presumably in response to the judgment of the Supreme Court of Appeal in C:SARS v South African Custodial Services 2012 (1) SA 522 (SCA), in which the phrase “related finance charges” was given a broad interpretation to include a variety of payments related to a finance transaction, including payments which are clearly dissimilar to interest, such as legal fees relating to the transaction.

In ITC 1963 85 SATC 246, a dispute about whether raising fees constituted “related finance charges” prior to the amendment of the definition of “interest”, the taxpayer was successful in its argument that raising fees were indeed “related finance charges” and thus deductible as “interest” for tax purposes.

The recent tax court judgment is the first to consider the meaning of the new phrase “similar finance charges”, and it did so in the context of raising fees. The court conducted an interpretative exercise and concluded that this exercise entails a determination of the meaning embedded in the text as “the most compelling and coherent account the interpreter can provide“, which is considered following a unitary approach taking into account the text, context and purpose of the provision in question.

The court held that since the definition of “interest” describes the term as “interest or similar finance charges“, one should interpret it to mean something which is an alternative to interest, and something other than interest. The court further explained that the word “similar” does not mean identical but rather requires the finance charges to bear a relevant resemblance to interest (i.e. characteristics which make it similar).

The court considered the elements of distinction and similarity between raising fees and interest.

SARS argued that raising fees must have the fundamental characteristics of common law interest, but the court disagreed and held that SARS seemed to conflate the meaning of “similar” and “same”.

Another point on which SARS sought to distinguish the raising fees was that they were separate and distinct from the interest because they were incurred before the effective dates of the funding agreements. The court held that the timing was not a relevant dissimilarity between interest and raising fees, as it did not change the nature of the raising fee charges.

SARS also argued that the raising fees differed from interest in that the payment of the raising fees was an advance condition to the loan capital being advanced, whereas the interest was payable on future dates subsequent to the advance of the loans. The court held that this argument was premised on the incorrect notion that interest was paid for the use of the loan capital when, in fact, they were loans for consumption.

Perhaps linked to the previous point, SARS further pointed out that the raising fees were not compensation for the use or benefit of the loan money because the fees had to be paid before the taxpayer would receive the benefit of the loans. The court disagreed on the basis that the raising fees formed part and parcel of the compensation which the taxpayer had to give for the loans – without payment of the raising fees, the taxpayer would not have had the benefit of the loan capital.

With reference to an argument by SARS that, although the raising fees were expressed as a percentage of the loans, they were not fixed with reference to the time value of money and/or the capital outstanding at any point during the term of the loans, the court held that SARS seems to appreciate that the fact that a percentage fee is charged is a similarity, but in also requiring the fee to take into account the time value of money or the capital outstanding from time to time is to incorrectly elevate the meaning of “similarity” to “sameness”. 

SARS argued that the raising fees were consideration for arranging the loans and not for the use of the loans, but the court’s take on that was that it demonstrates the close proximity or association between the raising fees and the loans and is indicative of a relevant similarity between interest and raising fees.

The fact that interest was paid periodically and raising fees once-off was held not to be a relevant dissimilarity. The court considered that the same “interest” definition was used for “hybrid interest” (which is not fixed with reference to the time value of money/interest rate). Therefore, the fact that raising fees were once-off lump sum payments (i.e. not determined with reference to the time value of money) did not make them dissimilar to “interest” (as defined). Rather, the raising fees were found to be similar to interest in that they were determined with reference to the size of the loan capital and for the benefit of the loan capital, because without the taxpayer agreeing to pay the raising fees, the taxpayer would not have obtained the finance. Consequently, the obligation to pay the raising fees was considered part and parcel of the financing agreements, similar to the obligation to pay interest on the loan capital.

For these reasons, the court concluded that the most compelling and coherent interpretation was that the raising fees in question were “similar finance charges” to interest, as envisaged in the definition of “interest” in section 24J of the Income Tax Act and that such an interpretation would “not yield an unbusinesslike and unwieldy result“.

The post Are raising fees similar to interest? appeared first on Werksmans Attorneys.

On 23 October 2024, when the Minister of Finance presented his Media-term Budget Policy Statement to Parliament, he also tabled various fiscal Bills.  In this publication we deal only with the Taxation Laws Amendment Bill, 2024 and the Tax Administration Laws Amendment Bill, 2024.

As has been the trend for several years, the number of significant amendments has significantly reduced.  The majority in number of the amendments are of a highly technical or esoteric nature, many of which are more of interest to tax professionals than to the business community in general.  

Accordingly, we limit our discussion to those amendments which are likely to be of interest in the general business environment. 

Foreign exchange gains and losses

Most of the deductions claimable under the Income Tax Act, 1962 (the Act) require that a taxpayer must be carrying on a trade, as defined in the Act.  An exemption to this rule is section 24I of the Act dealing with foreign exchange gains and losses, whereby a loss is deductible even in the absence of trade. 

A difficulty has been noted in that a company might derive a foreign currency loss in circumstances where it has ceased to trade, eg, because it is insolvent and is being wound up, and the company incurs a foreign exchange loss, or its foreign exchange losses exceed its exchange gains. 

Unlike individuals and trusts, an assessed loss may only be brought forward from the previous year by a company and used to shelter the current year’s profit if it is carrying on a trade.  Where the company has ceased trading operations and is being wound up, there might be no trade in the current year, but nevertheless a (net) exchange loss could be incurred that could be carried forward to, but not claimed in, the subsequent year owing to the absence of trade.  On the other hand, there could be exchange gains in the following year, with nothing to shelter these gains.  To resolve this problem, section 24I is to be amended to provide that, in the case of a company that is not carrying on trade:

• it will be taxable on the excess of the foreign exchange gains (including premiums or like consideration in relation to foreign currency option contracts) over the foreign exchange losses (including premiums or like consideration in relation to foreign currency option contracts); or
• if the losses exceed the gains, then the net loss is deemed to be an exchange loss of the company in the immediately succeeding year.

The effect is the same as if the loss had been carried forward but which, owing to the lack of trade, would not have been available to shelter foreign gains in the following year.

This amendment comes into operation on 1 January 2025 and applies in respect of tax years commencing on or after that date.

Interest limitation rules

There are two interest limitation rules in the Act, being sections 23M and 23N.  The former relates to the limitation on a deduction for interest when it is paid to a foreign party that meets certain relationship tests, in which case the amount of interest claimable is limited to 30% of, what is colloquially referred to as, tax EBITDA. 

The other section, section 23N, applies where there are group restructurings undertaken on essentially a tax-free basis but where interest-bearing loans are used to fund the acquisition, and the interest is claimable as a deduction.  Section 23N also limits the amount of the interest that can be deducted. 

Up until now the calculation of the percentage of tax EBITDA was determined in terms of a formula that was, in brief, linked to the Reserve Bank’s repo rate.  The higher the repo rate the greater the percentage, and therefore the greater the amount of deductible interest.

This year the section has been amended to bring it into line with section 23M, so that the interest allowable will be limited to 30% of tax EBITDA.

This amendment comes into operation on 1 January 2027 and applies in respect of tax years commencing on or after that date.  This does allow for effectively a two-year phase-out period that might be sufficient in a number of cases where there will be adequate profits and/or adequate reductions in the debt, so that companies will not be affected too adversely in relation to existing loans.

Foreign Tax Credits

Section 6quat of the Act provides for the situation where a resident of South Africa derives foreign income and capital gains and the foreign country has imposed a tax thereon. The section allows the resident to claim the foreign tax paid as a credit against the South African tax payable, but only to the extent that the foreign income falls into taxable income.

In the case of capital gains individuals are taxable on 40% of the gain (which is why one speaks of a CGT rate of 18%, which is really 45% of 40%) and companies and trusts are taxable on 80% of the gains (for companies 80% of 27% is 21.6%, and for trusts 80% of 45% is 36%).

It follows that if a foreign country imposed a tax on a foreign capital gain, under section 6quat the taxpayer could claim only 40% or 80%, as the case may be, of the foreign tax paid.

This year’s amendment now has the effect of allowing the full foreign tax paid to be claimed as a credit.

This amendment comes into operation on 1 January 2025 and applies in respect of tax years commencing on or after that date.

Tax administration

When a taxpayer wishes to dispute an assessment raised by SARS, the first step is to lodge objection.  If the objection is disallowed (in whole or in part) the taxpayer is entitled to lodge appeal, in which case the matter will proceed to be heard in the Tax Court (or the Tax Board if the amount of tax in dispute does not exceed R1 million).

Before the appeal procedures commence (essentially being the equivalent of exchanging pleadings) the taxpayer is entitled to request alternative dispute resolution (ADR).  Under ADR the taxpayer and SARS meet informally and on a without prejudice basis, often mediated by a suitable SARS official (or it could be an independent party) and the taxpayer and SARS attempt to reach a meeting of minds.  Obviously, the taxpayer would seek to persuade SARS to accept the taxpayer’s version, and SARS will do likewise in relation to its own position. 

It does sometimes happen that a taxpayer manages to persuade SARS to concede the matter.  More often than not, however, the best that the taxpayer will be able to do is propose and reach a settlement with SARS that will result in a lesser amount of tax (and penalties and interest) having to be paid.  If the settlement proposal is agreed to by SARS, the settlement is embodied in a written agreement to which SARS must give effect by issuing reduced assessments, and the taxpayer must pay what has been agreed.  

This year the legislation has been amended so that SARS and the taxpayer may, by mutual agreement, attempt to resolve the dispute through ADR prior to objection even having been lodged. 

In such case the objection procedures are suspended while the ADR procedure is ongoing (so, for example, the obligation to lodge objection within 80 business days of the date of the assessment is suspended).

This change would facilitate an earlier resolution and/or settlement and would also save costs for the taxpayer and reduce the relevant resources that must be dedicated to the matter by SARS.

This amendment comes into operation on a date notified by the Minister of Finance in a notice published in the Government Gazette.

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Introduction

The controlled foreign company (CFC) rules are contained in section 9D of the Income Tax Act, 1962 (the Act) and are designed as an anti-avoidance provision to prevent accumulation of (essentially) passive income in foreign companies owned by South African-resident shareholders, as opposed to being taxed in South Africa. 

The CFC rules are lengthy and complex with a number of exemptions and exceptions to the exemptions, and these are beyond the scope of this article.  What I wish to focus on is an amendment introduced a couple of years ago as an adjunct to the exchange control relaxation of the so-called “loop” rules .

General principles

The general principle in relation to the CFC rules is that the foreign company’s taxable income (where any of the exemptions does not apply) is calculated in terms of the requirements under the Act, and then an amount equal thereto is included in the (taxable) income of each South African-resident shareholder, pro-rata to the shareholding. 

In doing so, no account is taken of the identity of the South African shareholder.  For example, if a CFC makes a capital profit on disposal of an asset, the capital gain is calculated as being 80% thereof, so that if an individual is a shareholder, he or she will be taxed at 45% of that capital gain, giving rise to an effective tax rate of 36%, as opposed to the effective CGT rate otherwise applicable to natural persons, being 18%. 

A similar problem arises with foreign dividends.  In general, if a South African-resident company earns a foreign dividend which is taxable here, the taxable portion of the dividend is determined by multiplying the dividend by the ratio of 20 to 27.  When that taxable portion is multiplied by the company tax rate of 27%, the effective tax rate is 20% (ie R100*20/27*27% = R27).  On the other hand, a foreign dividend received by an individual results in a taxable amount equal to the foreign dividend multiplied by the ratio of 20 to 45, and when this taxable amount is multiplied by the individual rate of 45%, the effective rate of tax on the dividend is also 20% (ie R100*2045*45% = R45). 

However, for CFC purposes the taxable portion of the foreign dividend is still multiplied by the corporate ratio of 20 to 27.  So if the shareholder is an individual and the taxable portion of the dividend is multiplied by 45%, the effective rate is not 20% but 33.33%.

The loop provisions

As is well-known, there used to be a total prohibition imposed by the Reserve Bank on so-called loop arrangements, where South African residents were directly or indirectly interested in an offshore structure that, in turn, held assets in South Africa.  These rules have gradually been relaxed and, while theoretically they have been abolished, in practice there are still certain restrictions thereon. 

One of the requirements to facilitate further relaxation of the loop rules was that certain amendments needed to be made to the Act, and particularly in relation to the CFC rules.  For the purposes of this article, the focus is on the treatment of South African dividends payable by a South African company to an offshore holding company which is a CFC. 

Prior to the amendment

As we all know, the rate of dividends tax to be withheld from a dividend distributed by a South African company is 20%.  In the case of a foreign shareholder this rate may be reduced in terms of an appropriate double tax agreement.  Particularly in the case of corporate shareholders, the rate could be reduced to as low as 5%. 

So assume that the shares in a South African company (SACo 1) are held by a holding company in Mauritius (MCo), the rate of withholding tax will, under the double tax agreement between the two countries, be reduced from 20% to 5%.  If the shares in MCo were held by South African residents to the extent of more than 50%, then MCo would be a CFC.  However, because MCo’s taxable income had to be determined in terms of the Act, the dividend from SACo 1 was not taxable, because South African dividends are exempt from income tax (albeit subject to the dividends tax, which is a separate tax). 

Subsequent to the amendment

As mentioned, the purpose of the amendment was to facilitate the relaxation of the loop rules for exchange control purposes, but without resulting in a reduction of the South African tax base.  As demonstrated, this could result in a reduction of dividends tax from 20% to 5%. 

Accordingly, the exemption from income tax normally applicable to South African dividends was partially removed under section 9D of the Act in calculating the CFC’s taxable income.  The removal of the exemption depended upon the extent to which dividends tax was actually payable.  So, for example, if the dividends tax rate was at 20% (because the CFC was resident in the jurisdiction where there was no double tax agreement), then the South African dividend effectively retained its full exemption for CFC purposes.  But if the withholding rate was only 5%, such as under the treaty with Mauritius, then effectively 75% of the dividend was brought into the net, and then that amount of 75% was multiplied by the ratio of 20 to 27 to give the taxable amount. 

Effect of the amendment

So consider the situation where a South African company (SACo 2) is the shareholder of MCo.  In computing the taxable income on a dividend from SACo 1 of, say, R1 million, from which 5% or R50 000 was withheld as dividends tax, 75% of the dividend would be multiplied by the ratio of 20 to 27 to arrive at the taxable income of MCo.  That taxable income would then be taxable in the SACo 2’s hands at the rate of 27%, and the tax so computed will amount to R150 000 (ie R1 000 000*75%*20/27*27%).  So if this amount is then added to the R50 000 withheld by SACo1 as dividends tax, it results in a total South African tax of R200 000, which represents the headline withholding tax rate of 20% on a dividend of R1 million.

Problems with this approach

The first problem is to ask why a South African corporate shareholder of the CFC – SACo 2 here –  should be subject to 20% tax on the dividend from the South African company – SACo 1 here.  After all, if MCo had not been interposed between SACo 2 and SACo 1, SACO 2 would not have been taxable on the dividend at all because a dividend from one South African company to another South African company is exempt from dividends tax.  So here a dividend is being subject to tax at 20% where, but for the loop, it would have been zero.  One must therefore ask where is the prejudice to the South African tax base?  In fact, with the MCo being interposed there is still the withholding of R50 000, which would not have been payable had MCo not existed in the chain of ownership.  And, what is more, with SACo 2 having been taxed directly and indirectly to the extent of R200 000, if it receives a dividend from MCo and on-distributes it to its (non-corporate) shareholders, there will be further South African dividends tax at the rate of 20%. 

The second problem arises where the shareholder of MCo is an individual or a trust.  Once again, applying the formula, the taxable income of MCo under the CFC rules will be 75% of the dividend of R1 million multiplied by the ratio of 20 to 27.  When this taxable income is taxed under the CFC rules in the hands of the shareholder, it is multiplied by 45%.  This results in  tax payable of R250 000 (ie R1 000 000*75%*20/27*45%) so that, when added to the withholding tax of R50 000, gives a total effective tax rate of 30% – much more than the 20% by which the tax base has supposedly been prejudiced.  This now becomes punitive rather than it merely being a case of protecting the tax base to enable the fiscus receive what should have been received but for the interposition of MCo. 

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Taxpayers have multiple tax risk management options at their disposal when entering into complex transactions with each option having its own advantages and disadvantages. The complexity of the transaction and level of assurance required are often determinative when it comes to selecting the appropriate tax risk management option. The most common tax risk management option is to obtain an opinion from an independent SARS-registered tax practitioner and, to a lesser extent, an Advance Tax Ruling (“ATR“) from the South African Revenue Service (“SARS“).

An opinion obtained from independent SARS-registered tax practitioner is the cheapest tax risk management option and provides the taxpayer with protection against the imposition of an understatement penalty and potentially also underestimation penalty in the event of SARS assessing the taxpayer on the particular transaction on a basis contrary to what is outlined in the opinion. Certain requirements must, however, be satisfied for the understatement penalty protection to apply. The first set of requirements are that the taxpayer must have fully disclosed the transaction to SARS by no later than the date on which the return incorporating the transaction is due and that the opinion must have been issued to the taxpayer by no later than such date. The second set of requirements relate to the qualities of the opinion and require that it be based upon a full disclosure of the specific facts and circumstances in respect of the transaction and that it confirms that the taxpayer’s position is more likely than not to be upheld in the event of the matter proceeding to court. Therefore, if a taxpayer obtains an opinion adhering to the above requirements and SARS assesses the taxpayer on the particular transaction in a manner that is contrary to what was outlined in the opinion, the taxpayer will only be required to settle the additional taxes, interest and possibly also the percentage-based penalty resulting from the additional assessment. In this case, the understatement penalty must be waived. The opinion, therefore, effectively acts as insurance against the imposition of an understatement penalty on the particular transaction. There is, however, a school of thought holding that the understatement penalty cannot be waived where it is imposed in respect of “impermissible avoidance arrangements” which refer to cases where SARS successfully invokes the General Anti-Avoidance Rule (“GAAR“) in section 80A to 80L of the Income Tax Act, No 58 of 1962 or its corollary for Value-Added Tax (“VAT“) purposes in section 73 of the Value-Added Tax Act, No 89 of 1991.[1] Proponents of this school of thought, therefore, hold that an opinion obtained from an independent SARS-registered tax practitioner adhering to the above requirements does not provide any protection against the standard 75% understatement penalty imposed in respect of “impermissible avoidance arrangements”.

An ATR is issued by SARS to a particular taxpayer to provide certainty on the tax implications resulting from a transaction that the taxpayer proposes to undertake, but has not yet undertaken. An ATR is, however, only binding on SARS and the applicant(s) thereto and cannot be relied upon by other taxpayers. The only material difference between an ATR and an opinion obtained from an independent SARS-registered tax practitioner is that SARS is bound by the tax implications outlined in the ATR issued to the applicant(s) whereas the opinion has no binding effect on SARS. The level of assurance provided by an ATR is, therefore, substantially better than what is provided by an opinion as the applicant(s) has absolute certainty that the tax payable on the transaction is per the principles outlined by SARS in the ATR. The risk of SARS imposing any additional tax, understatement and percentage-based penalties and/or interest on the transaction down the line is, therefore, completely mitigated by obtaining an ATR. The ATR system does, however, have certain drawbacks including that (i) SARS and the taxpayer do not always agree on the tax implications in respect of the proposed transaction; (ii) the costs involved in obtaining an ATR is usually double the cost of an opinion as both the tax advisor and SARS charge fees for their time spent on the matter; and (iii) SARS is by law precluded from issuing an ATR on certain issues such as, inter alia, the application of the GAAR and the substance over form principle. Taxpayers who are entering into transactions that are potentially susceptible to attack under the GAAR (usually Merger and Acquisition (“M&A“) transactions) are, therefore, unable to mitigate their exposure to additional tax, the standard 75% understatement penalty and interest in the event of SARS assessing them under the GAAR. This lacunae can, however, be filled by tax indemnity insurance.

Tax indemnity insurance, which is predominantly provided by non-resident insurers, provides cover to a taxpayer against the risk of SARS assessing the taxpayer on a particular transaction in a manner contrary to what is outlined in the professional tax advice obtained by the taxpayer. The taxpayer is generally able to arrange cover not only for any additional tax on the particular transaction, but also for the interest, understatement and percentage-based penalties and defence costs. Tax risks of up to R10 billion can be insured and the cover is usually grossed-up to take into account in the tax that must be paid by the taxpayer on the receipt of the policy benefits, should the risk materialise. The cover period is typically seven years and can be increased up to ten years. The underwriting process usually entails the taxpayer obtaining an opinion from an independent SARS-registered tax practitioner which is then sent to the South African insurance broker (which acts as intermediary between the taxpayer and the non-resident insurer), together with full details of the transaction and the relevant agreements. The insurer then assesses and, if acceptable, insures the risk against the payment of an upfront lump sum premium by the taxpayer. The lump sum premium is based on the risk and total cover required by the taxpayer and can be as low as 3% of the total cover required by the taxpayer. The tax indemnity insurance option is the most expensive tax risk management option given the insurance premium and the requirement for the taxpayer to obtain independent tax advice. It is, however, the only tax risk management option that provides the taxpayer with complete protection against the risk of SARS assessing the particular transaction under the GAAR and/or in a manner inconsistent with what is outlined in the opinion obtained by the taxpayer. In this regard, the taxpayer will still be liable for the additional tax, the standard 75% understatement penalty (in a GAAR case), possibly the percentage-based penalty and interest in the event of SARS assessing the taxpayer under the GAAR. The taxpayer will, however, receive the insurance pay out to enable it to settle its legal costs and the final tax liability.

Almost any type of tax risk can be covered by tax indemnity insurance including, inter alia, the following:

• The GAAR and substance over form principle;
• The application of any specific anti-avoidance rule;
• The disallowance of reduced South African withholding tax rates under an applicable double tax agreement as a result of the application of the principal purpose test and/or beneficial ownership test;
• Transfer pricing adjustments;
• Employees’ tax and employment tax incentive adjustments; and
• Valuation disputes.

Taxpayers obtaining tax indemnity insurance must carefully consider the tax implications in respect of the insurance. The payment of the insurance premium might require the insured to reverse charge VAT at 15% where the insurance cover relates to an M&A transaction. Further, the receipt of the policy benefits will result in tax implications for the taxpayer depending on the nature of the insured transaction. Lastly, exchange control approval must be obtained for the payment of the insurance premium which, in some cases, might require the taxpayer to obtain approval from the Financial Sector Conduct Authority.

The table below provides a summary of the main features of the three tax risk management options considered in this article.

In conclusion, each of the above tax risk management options represents an arrow in the quiver to effectively manage tax risks, based on the complexity of the transaction and the level of assurance required by the taxpayer. Tax indemnity insurance provides unique benefits when it comes to managing the tax risks associated with M&A transactions which is why its popularity as a tax risk management tool is increasing.

Footnotes

[1]        The validity of this school of thought becomes questionable when having regard to the findings in two recent cases handed down by the Supreme Court of Appeal, namely CSARS v Coronation Investment Management SA (Pty) Ltd 85 SATC 413, [2023] 2 All SA 44 (SCA) and CSARS v The Thistle Trust 85 SATC 347, 2023 (2) SA 120 (SCA).

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Section 46 of the Tax Administration Act, 2011 (TAA) allows SARS to request ‘relevant material’ in relation to a taxpayer for the purposes of administering a tax Act. In the recent case of CSARS v J Company 14944/19 the High Court had to evaluate the oft-debated issue of what material is considered relevant. The taxpayer was a South African company which procured and provided advice and project management services to clients undertaking various corporate and commercial transactions. The taxpayer charges a fee to clients for its services and recharges to the client any amounts it pays to specialist advisors engaged on behalf of the client.

SARS issued the taxpayer with a request in terms of section 46 of the TAA to provide copies of specified relevant material, including an explanation of the nature of each amount comprising the sales and other expenses reflected in the ITR14 together with supporting documentation and relevant invoices. The taxpayer provided SARS with schedules reflecting each item of income and expenditure but omitted the identity of the supplier or recipient of the service.  Supporting invoices relating to the income statement analysis were also provided, but some were redacted to conceal the identities of the counterparties and the nature of the services rendered. The redacted invoices specifically related to advisory fees and expenses incurred by the taxpayer for instructing attorneys and procuring a consulting service.

SARS contended that the taxpayer was non-compliant with section 46 and approached the Hight Court for an order forcing the taxpayer to provide un-redacted documents. The taxpayer’s primary submission was that the request for relevant material was only in respect of the taxpayer and the redacted information on the invoices related to the identity of the taxpayer’s clients and suppliers, in other words, parties other than the taxpayer, and thus was not ‘relevant material’.

Section 1 of the TAA defines ‘relevant material’ as any information, document or thing that “in the opinion of SARS is foreseeably relevant for the administration of a tax Act”. The taxpayer contended that SARS had failed to demonstrate why the redacted information was ‘foreseeably relevant’ for the administration of a tax Act.

The court’s response to this was that in most cases, SARS is not aware of what information or documentation is available in order for it to fully discharge its function of assessing a taxpayer’s liability and that it is not for the taxpayer to say that SARS has failed to include the reasons to prove that the documents may be “foreseeably relevant” when the taxpayer obstructs the very production of the material in order for the decisionmaker to make a decision.

The court confirmed that section 46 is clear in that when determining what material is ‘relevant’ it is the opinion of SARS that matters and not the opinion of the taxpayer.

It is accepted that information is the lifeblood of a revenue authority’s taxpayer audit function and the rationale of taxation would break down if a revenue authority had no effective powers to obtain confidential information about taxpayers who may be negligent or dishonest, resulting in the whole burden of taxation falling on diligent and honest taxpayers.

The court held that SARS has a duty to ensure that income is not derived from illegal sources or from illegal activities. The clients whose information was contained in the invoices would have a reciprocal duty or obligation to declare their income or expenses vis-a-vis the taxpayer in their financial statements and there is an obligation on SARS in the administration of a tax Act to be able to see a reciprocal entry in the receiving person’s bank account.

The court agreed with SARS that the nature of the taxpayer’s business and the parties with whom it conducts business in order to generate taxable income and claim allowable deductions is a matter by its very nature relevant to the tax affairs of the company. The court therefore ordered that the un-redacted invoices be provided to SARS.

Interestingly, in relation to the invoices concerning services provided by attorneys, the taxpayer did not claim legal privilege as the basis for its refusal to provide unredacted versions (although the court noted that the information which had been redacted “could hardly amount to privilege”, had that argument been put forward).

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A recent ruling published by SARS deals with the anti-avoidance implications of the disposal of an asset by a company shortly after its acquisition in terms of an asset-for-share transaction, where the asset disposed of was replaced in terms of the special relief available for replacement assets.

The applicant requesting the ruling is a South African company wholly owned by a natural person who operated a business as a sole proprietor. One of his business assets was an aircraft, which he was in the process of selling, to replace it with a new aircraft.

Prior to the sale and replacement of the aircraft, the sole proprietor wanted to transfer his entire business to his company in exchange for more shares in terms of the tax rollover relief applicable to asset‑for‑share transactions as contemplated in section 42 of the Income Tax Act. The rollover relief, if available, allows an asset to be transferred to a company in exchange for equity shares of equivalent value without any immediate tax consequences. The company, essentially, steps into the shoes of the transferor and inherits the tax profile of the transferor with respect to the asset acquired.

The aircraft which the company acquired from the sole proprietor was treated for tax purposes as a capital asset which qualified for tax-deductible capital allowances, so that the company inherited the tax value of the aircraft acquired.

The rollover relief rules contain specific anti-avoidance provisions. One of the anti-avoidance provisions applicable to asset-for-share transactions determines that a company disposing of a capital asset that qualified for tax-deductible allowances within 18 months of its acquisition in terms of an asset-for-share transaction must ring-fence (and be subject to tax without setting off against losses):

• so much of a capital gain determined in respect of the disposal of the asset as does not exceed the amount that would have been determined had the asset been disposed of at market value at the time of the asset-for-share transaction; and
• so much of any allowance in respect of that asset that is recovered or recouped as a result of the disposal as does not exceed the amount that would have been recovered or recouped had the asset been disposed of at the time of the asset-for-share transaction.

Due to the need to replace the aircraft, the company disposed of the aircraft acquired in terms of the asset-for-share transaction within the 18-month period which triggered the anti-avoidance rule referred to above.

The aircraft was, however, replaced by a new aircraft. The replacement asset relief claimed by the company allows for the capital gain arising from the disposal of an asset, as well as the recoupments arising from such disposal, to be deferred where the asset disposed of is replaced within a certain time by another qualifying asset and the other requirements of the relief are met. In this case, absent the 18-month complication, the company qualified for the replacement relief so that no capital gain or taxable recoupment would have resulted from the disposal of the aircraft.

The ruling therefore dealt with the complication added by virtue of the fact that the aircraft that is being replaced was acquired by the company in terms of an asset-for-share transaction entered into less than 18 months prior to the disposal of the asset.

If the company did not elect the relief available concerning replacement assets, the company would have –

• realised a capital gain on the disposal of the aircraft, and so much of that capital gain as would not have exceeded the capital gain that would have arisen had the aircraft been disposed of at market value on the date of the asset-for-share transaction would be ring-fenced and taxed without the benefit of setting it off against any losses; and
• recouped previously claimed capital allowances, and so much of that recoupment as would not have exceeded the recoupment arising on a disposal at market value on the date of the asset-for-share transaction, would similarly be ring‑fenced and taxed.

The ruling clarifies that, as a result of the disposal benefiting from the replacement asset relief, there is no capital gain or recoupment on the disposal within the 18-month period which could (to an extent) be ringfenced and taxed in terms of the anti-avoidance rule. This is an important indication of how SARS views the interpretation of the anti-avoidance rule applicable to the rollover relief provisions that deal with the disposal of assets acquired in terms of the relief, within the 18‑month window.

We agree with the approach adopted by SARS in that the anti-avoidance rule can only potentially apply if the disposal within the 18-month period gives rise to an actual capital gain or recoupment. If, for some reason, the actual disposal would not give rise to a capital gain or recoupment (for example, because rollover relief applies to the actual disposal, or replacement asset relief applies, or because there is no gain or recoupment due to the amount of disposal proceeds received), the anti-avoidance provision cannot be interpreted to mean that if there would have been a gain or recoupment at the time when the asset-for-share transaction was entered into based on the market value of the asset at that time, such (deemed) gain or recoupment must be recognised, ring-fenced and taxed purely because the disposal occurred within 18 months of the asset-for-share transaction.

The takeaway from Binding Private Ruling 399 is that:

• Although the ruling and other rulings are non-binding concerning anyone other than the party identified in the ruling and may not be cited as authority in any proceeding other than proceedings involving the applicant for that specific binding private ruling, the views expressed by SARS are consistent with the purpose of the corporate rules and the rollover relief provided therein.
• The absence of an actual capital gain or recoupment on disposal of an asset within 18 months of its acquisition under the rollover relief provisions, constitutes an absolute bar to the application of the anti-avoidance provision aimed at disposals within the 18‑months window. The anti‑avoidance provisions were not intended to levy tax on gains and recoupments which would otherwise not exist. Put differently, if no capital gain or recoupment actually arises on the disposal within 18 months, there is nothing to ring-fence and no tax liability.

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