Businesses generally adopt a corporate form (a company). An alternative structure which is sometimes adopted is that of a partnership. The key difference between a company and a partnership is that a company has legal personality and is therefore treated as a person for corporate and tax purposes. A partnership, conversely, does not have legal standing in South Africa and is not treated as a distinct taxable entity. Accordingly, a partnership is not liable to tax in terms of the Income Tax Act No 58 of 1962 (ITA). As a result, income earned by a partnership is not taxed in the partnership. Rather, the partners are taxed on their proportionate share of the partnership income and are able to claim deductions in respect of expenses incurred by the partnership in the course of carrying on its business or trade. There is an exception in the Value Added Tax Act (VAT Act), which allows a partnership to apply to be registered as a vendor, notwithstanding the fact that it has no distinct legal existence. It is also common for non-residents to operate branch operations in South Africa. The tax rate of a branch is aligned to that of a corporate; however, South Africa does not have branch profit-repatriation tax. 

The partnership structure is commonly used in the private equity sector, with most private equity funds being set up as en commandite partnerships. A small number of private equity funds have been set up as trusts (specifically, bewind or ownership trusts). South Africa has legislation that favours these structures, from a permanent establishment perspective, to encourage the use of South African general partners. 

In terms of the ITA, a person (other than a natural person) qualifies as a South African tax resident if it is incorporated, established or formed in South Africa or has its place of effective management in South Africa. This excludes any person who is deemed to be exclusively a resident of another country for purposes of the application of any double-taxation agreement (DTA) entered into between the governments of South Africa and that other country. Transparent vehicles do not have a residence test; rather, one looks through the transparent vehicle to the tax residence of the beneficial owners.

Companies currently pay corporate income tax at 28%. This rate is set to reduce to 27% with effect from the year of assessment (tax year) ending on or after 31 March 2023. Trusts pay income tax at a flat rate of 45% and individuals pay income tax at marginal rates, ranging from 18% to 45%. Branches of foreign companies are taxed at 28% and South Africa does not levy branch repatriation taxes.

Income tax is levied on taxable income. “Taxable income” is defined as the aggregate of:

• the amount remaining after deducting from the income of any person all the amounts allowed to be deducted from or set off against that income; and
• all amounts to be included or deemed to be included in the taxable income of any person in terms of the ITA; the formula set out below illustrates the calculation of taxable income in accordance with the definition:

1. gross income (as defined in 1.4 Tax Rates) is Rxxx, less exempt income (xxx) = income xxx
2. less deductions and allowances (xxx), less assessed loss brought forward (xxx) = xxx
3. plus taxable capital gains xxx total = xxx plus inclusions in taxable income (xxx) = xxx (xxx)
4. taxable income (or assessed loss) = Rxxx.

The calculation of taxable income does not necessarily coincide with the calculation of accounting profits, and adjustments are necessary when completing tax returns. 

There is provision in the tax legislation which grants a special allowance in respect of scientific or technological research and development.

There are special incentives for companies that are in the mining industry, the oil and gas industry, owners/charterers of aircraft and ships, farming or the production of renewable energy, manufacturing and hotel-keeping. Attention is drawn to the announcement by the Minister of Finance in 2020, during which he stated that, in order to promote economic growth, the government intended to restructure the corporate tax rate over the medium term by broadening the base and reducing the rate. Broadening the base would involve minimising tax incentives, among others. 

Taxpayers are entitled to carry forward assessed losses (tax losses) and set them off against their income in future years. At this stage, the only requirement is that the taxpayer must be trading in order to be able to utilise its assessed losses. There is currently no limit on the use of assessed losses. Therefore, provided that a taxpayer is still trading, it can utilise its assessed losses in perpetuity. However, there are plans to introduce rules that will limit the use of assessed losses by taxpayers. These rules will come into effect with effect from the tax year ending on or after 31 March 2023. In terms of the amended rules:

• a company will be able to set off any balance of assessed loss incurred in any previous tax year carried forward from the preceding tax year subject to a limit of ZAR1 million or 80% of the amount of taxable income, whichever is higher; and
• a taxpayer other than a company will be able to set off its balance of assessed loss in full. 

There are anti-avoidance provisions that apply to prevent the abuse of assessed losses to the detriment of the fiscus. These are contained in section 103(2) of the ITA. 

The rules on limits imposed generally on the deduction of interest by local corporations are contained in section 23M and 23N of the ITA. Section 23M limits the deduction of interest incurred in respect of debts owed to persons that are not subject to tax in South Africa. In terms of the section, the amount of interest allowed to be deducted cannot be more than an amount calculated in terms of a prescribed formula. The excess of the interest over the amount calculated may be carried forward to the immediately succeeding tax year and will be deemed to be interest incurred in that succeeding tax year. 

Section 23N limits the deduction of interest incurred in respect of debt incurred to fund an acquisition in terms of a reorganisation and acquisition transactions. In terms of the section, the amount of interest allowed to be deducted cannot be more than an amount calculated in terms of a prescribed formula. The interest deduction is subject to a limit of six tax years, ie, the tax year in which the acquisition takes place and the five tax years subsequent to the acquisition.

South Africa does not have a system of group taxation. Every company in a group of companies is taxed separately on its own income and assessed/tax losses attach to each company. Only the company that has accumulated tax losses can utilise or set off those losses.

South African-resident companies are subject to tax on worldwide capital gains at an effective rate of 22.4%. With effect from the tax year ending on or after 1 March 2023 the effective rate is 21.6%. Non-resident companies only pay tax on capital gains realised on the disposal of:

• immovable property situated in South Africa;
• interests in or rights to immovable property situated in South Africa, including rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources; and
• assets that are effectively connected with a permanent establishment (PE) of the non-resident in South Africa.

The ITA defines an interest in immovable property to include equity shares held in a company or ownership or the right to ownership in any other entity or a vested interest in any assets of any trust, if:

• at least 80% of the market value of those equity shares, ownership or right to ownership or vested interest, as the case may be, at the time of disposal thereof is attributable directly or indirectly to immovable property situated in South Africa or any interest or right, including rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources in South Africa; and
• in the case of a company or other entity, that person (whether alone or together with any connected person in relation to that person), directly or indirectly, holds at least 20% of the equity shares in the company or ownership or right to ownership of that other entity.

Where a DTA has been concluded between South Africa and the non-resident’s country of residence, its provisions will be taken into account in determining whether the non-resident is subject to South African tax on its capital gains.

Value-added Tax and Securities Transfer Tax (in the event that the transaction involves the acquisition of shares).

Incorporated businesses are not subject to any other notable taxes.

Closely held local businesses are generally in corporate form (specifically, companies).

There are anti-avoidance provisions relating to personal service-providers (PSPs). A “personal service-provider” is any company or trust where any service rendered on behalf of that company or trust to a client of the company or trust is rendered personally by any person who is a connected person in relation to the company or trust, and:

• the person would be regarded as an employee of the client if the service were rendered by him or her directly to the client, other than on behalf of the company or trust; or
• where those duties must be performed mainly at the premises of the client, the person or company or trust is subject to the control or supervision of the client as to the manner in which the duties are performed, or are to be performed in rendering the service; or
• where more than 80% of the income of the company or trust during the tax year, from services rendered, consists of or is likely to consist of amounts received directly or indirectly from any one client of the company or trust, or any associated institution in relation to the client.

Excluded from the ambit of the definition are companies or trusts which, throughout a tax year, employ at least three full-time employees who are engaged on a full-time basis in the business of the company or trust of rendering any such service, other than any employee who is a shareholder in the company or settlor or beneficiary of the trust or is a connected person in relation to such a person. In terms of the ITA, a PSP qualifies as an employee for tax purposes, with the consequence that fees earned by the PSP are subjected to tax employees’ tax (Pay-As-You-Earn) as if the PSP were a natural person.

There are no rules preventing closely held corporations from accumulating earnings for investment purposes.

South African tax-resident individuals are subject to a withholding tax at a rate of 20% on dividends paid by South African-resident companies or non-resident companies that are listed in South Africa. Non-resident individuals are also subject to the withholding tax at the same rate. However, the rate of tax may be reduced by the provisions of a DTA. South African tax-resident individuals are also subject to capital gains tax on capital gains realised on the disposal of their assets (in the case of capital assets or assets held as long-term investments) or income tax (in the case of assets held for a profit-making purpose). The gains are taxed at effective tax rates ranging between 7.2% and 18%. The income tax is levied at rates ranging between 18% and 45%. In addition, they pay income tax on foreign dividends (dividends paid by non-resident companies or headquarter companies). Certain foreign dividends are fully exempt from tax and some foreign dividends are partially exempt. With regard to non-resident individuals, see 2.7 Capital Gains Taxation.

See 3.4 Sales of Shares by Individuals in Closely Held Corporations.

South Africa levies withholding taxes on dividends, interest, royalties and payments to foreign entertainers and sportspersons. The withholding tax on dividends is levied at a rate of 20%. The withholding taxes on interest, royalties and foreign entertainers/sportspersons are levied at a rate of 15%. The rates at which the withholding taxes are levied can be reduced by the provisions of a DTA. The withholding tax on foreign entertainers and sportspersons does not apply where the non-resident is:

• an employee of an employer who is a South African resident; and
• physically present in South Africa for a period or periods exceeding 183 full days in aggregate during any 12-month period commencing or ending during the tax year in which the specified activity is exercised.

In addition to the withholding taxes mentioned previously, South Africa also imposes an obligation on persons who are obliged to make payments to non-residents or for the benefit of non-residents in respect of the disposal of immovable property in South Africa to withhold a certain percentage of the amount payable. The amount withheld is an advance payment in respect of the non-resident’s liability for tax (capital gains tax) in South Africa. The amount withheld must be paid to the South African tax authorities within 14 days after it was withheld, where the person making payment is a South African resident, or 28 days after it was withheld where the person making payment is a non-resident of South Africa.

The primary tax-treaty countries used by foreign investors to make investments in local corporate stock or debt are Mauritius, Luxembourg and the Netherlands.

This is not common practice in South Africa.

The absence of an Advance Pricing Agreement (APA) regime and the lack of transfer-pricing skills within the tax authority are the biggest transfer-pricing issues presented for inbound investors operating through a local corporation. The South African tax authority is currently considering the feasibility of introducing an APA regime in South Africa. 

The local tax authorities have considered and will continue to consider these types of arrangements in the context of transfer-pricing audits, in order to ensure a fair return for the South African related party.

No significant aspects of local transfer-pricing rules and/or enforcement vary from OECD standards.

This mode of settlement is not often used in practice, although it has gained some momentum. The local authorities are amenable to utilisation of the Mutual Agreement Procedure (MAP) process, provided all other avenues of resolution have been exhausted.

Compensating adjustments are allowed/made, typically factored in as part of the settlement package, and especially where a DTA is applicable.

Non-local corporations are only taxed on South African-sourced income. If the head office has access to a DTA, the existence of a PE as a result of the branch becomes relevant. If the branch constitutes a PE, only South African-sourced income attributable to that branch may be taxed in South Africa, typically. There is no profit-repatriation tax in South Africa.   

See 2.7 Capital Gains Taxation.

There is an anti-avoidance provision in the restructuring provision dealing with intra-group transactions (section 45 of the ITA), which applies where a transferee company that acquired an asset in terms of an intra-group transaction, or in terms of one or more intra-group transactions which were tax-neutral, ceases to form part of any group of companies as the transferor company or any controlling group company in relation to the transferor company, prior to disposing of the asset in question and within six years after the acquisition of the asset. The anti-avoidance provisions are unlikely to apply to the disposal of an indirect holding much higher up because the transferee and transferor companies are likely to remain part of the same group of companies after that disposal.

See 2.1 Calculation for Taxable Profits. 

In terms of the ITA, a taxpayer can only deduct expenses which they incur for the purpose of their business and in the production of their income. Based on this principle, a local affiliate would not be entitled to deduct expenses incurred by a non-local affiliate. There is scope for South African taxpayers to be charged management or administrative fees, but the exchange control authority regulates the payment of these and requires third-party expert assurance that the arrangements are priced correctly (ie, at market value) and that the South African party does in fact receive the full benefit for what they pay for. 

Exchange control approval must be obtained from the South African Reserve Bank. The transfer-pricing rules (contained in section 31 of the ITA) will apply to the borrowing. Sections 23M and 23N may also apply to the borrowing. Section 31 applies prior to considering the impact, if any, of section 23M and section 23N.

Local corporations are subject to tax on their worldwide income. If the foreign income of a local corporation has been taxed in another jurisdiction, the corporation may obtain relief from double taxation in terms of the ITA or a double-taxation agreement. There are limited items that may be exempt, eg, certain foreign dividends.

See 6.1 Foreign Income of Local Corporations.

See 3.4 Sales of Shares by Individuals in Closely Held Corporations. Local corporations are likely to rely on the participation exemption in order to claim full exemption from income tax in respect of the dividends.

The South African Exchange Control Authority regulates the use of South African intangibles outside of SA. It is often very difficult to dispose of these intangibles to related parties. It is, however, fairly simple to dispose of these to unrelated parties. It is more common in the case of related-party arrangements for intangibles to be licensed to foreign related parties. This triggers the transfer-pricing rules and typically results in a market-related royalty being paid to the South African owner of the intangible. Where permission is granted for the sale of intangibles, this may have income tax consequences, as well as capital gains tax consequences, depending on how the asset has been treated for income tax purposes by the seller.

Local corporations are taxed on the income of their CFCs. Local corporations that have non-local branches are taxed on their worldwide income, but this is not in terms of CFC rules.

South Africa does not have specific substance rules for taxation purposes.

Local corporations are subject to tax (capital or revenue) on their worldwide income. In the case of foreign affiliates, any capital gain derived on the sale of shares will be subject to tax in South Africa unless the capital gains tax-participation exemption applies. The latter typically applies where the South African resident holds at least 10% of the equity shares in the foreign affiliate, the requisite shareholding has been held for at least 18 months and the shares are disposed of to a non-resident purchaser that is neither a connected person in relation to the South African seller nor a CFC for South African tax purposes.

There is a General Anti-Avoidance Rule in the ITA. This is contained in sections 80A to 80L of the ITA.

The South Africa tax authority selects taxpayers for audit on the basis of its risk assessment.

South Africa has adopted specific rules to limit the amount of interest that can be deducted in South Africa where a foreign related-party creditor is involved. These are contained in specific anti-avoidance rules (section 23M) over and above the transfer-pricing provisions. South Africa also introduced a VAT on electronic services in 2014 and was one of the first countries to do so.

The South African government is in favour of the BEPS initiative with South Africa being a signatory to the OECD Multi-Lateral Instrument (yet to be ratified). The government seeks to assist in the prevention of global tax avoidance through profit-shifting, as well as to protect the South African tax base. It is still being considered whether Pillar One and Pillar Two will be given effect to in South Africa. Concerns have been raised that these initiatives favour developed countries and may therefore not be suitable for South Africa.

International tax has a high public profile in South Africa. The government are fully in support of the BEPS recommendations.

This is not applicable, as South Africa is a high-tax jurisdiction. It is anticipated that substance requirements may be introduced for South African headquarter companies.

South Africa has a "headquarter" tax regime, which is often used for investment into the rest of Africa, given the extensive South African DTA network and the benefits attributable to the respective regime.

South Africa has introduced specific provisions to deal with hybrid debt and hybrid equity instruments. In each instance, the respective instruments are recharacterised, in order to give effect to their economic substance as opposed to their legal form. For example, treating debt items (legal) as equity items (substance), and vice versa. These rules existed prior to the BEPS initiative, but the South African government has been seen to focus more on them to assess whether they need to be expanded.

South Africa taxes its residents on a "worldwide" basis whilst it taxes non-residents on a "source" basis. In general terms, interest must be incurred in the production of amounts that are "subject to" tax in South Africa. If the amounts are deductible, they are subject to specific limitations imposed by certain anti-avoidance provisions, as well as transfer-pricing provisions, which deal with the rate of interest as well as the quantum of debt (both based on the arm’s-length principle). Interest payments made to non-residents are also subject to a domestic withholding tax of 15%, unless reduced by an applicable DTA.

CFC legislation in South Africa is complex and requires specific consideration when investing from South Africa into foreign jurisdictions. The provisions are focused on taxing items of income that arise from related-party transactions, transactions involving income streams that can be easily moved from the South African tax net (eg, interest and royalty income) and income that is not attributable to fully fledged business operations in foreign countries, especially where the substance requirements as set out in the CFC provisions are found to be wanting. They only apply to residents of South Africa and therefore do not impact non-residents.

Once South Africa ratifies the Multi-Lateral Instrument (MLI), the Principal Purpose Test and the application thereof to South African DTC counterparties is likely to become a significant consideration for both inbound and outbound investors. Further, the changes arising from the Multi-Lateral Instrument to the preparatory and auxiliary provisions across South Africa's DTA network must be carefully considered.

The transfer-pricing changes introduced by BEPS have not been seen as changing things radically in South Africa.

South Africa is currently in favour of provisions for transparency and country-by-country reporting.

Proposals are currently being considered by the South African government (National Treasury). South Africa was one of the first countries to introduce VAT on electronic services in 2014.

South Africa was one of the first countries to introduce VAT on electronic services.

South Africa has taken specific steps in relation to intellectual property developed in South Africa, which is then exported out of South Africa and licensed back into South Africa. If the criterion is met and the intellectual property is regarded as "tainted", tax deductions in respect of the tainted intellectual property arrangement are denied in South Africa. There is also a withholding tax on royalties.