Tax on corporate lending and bond issues in South Africa: overview

A Q&A guide to tax on finance transactions in South Africa.

This Q&A provides a high level overview of finance tax in South Africa and focuses on corporate lending and borrowing (including withholding tax requirements), bond issues, plant and machinery leasing, taxation of the borrower and lender when restructuring debt, securitisations, the Foreign Account Tax Compliance Act (FATCA) and bank levies.

To compare answers across multiple jurisdictions, visit the Tax on Corporate Lending and Bond Issues: Country Q&A tool.

The Q&A is part of the global guide to tax on transactions. For a full list of jurisdictional Q&As visit www.practicallaw.com/taxontransactions-guide.

Contents

Tax authorities

1. What are the main authorities responsible for enforcing taxes on finance transactions in your jurisdiction?

The main authority responsible for enforcing taxes on finance transactions in South Africa is the South African Revenue Service (SARS).

Pre-completion tax clearances

2. Is it possible or necessary to apply for tax clearances from the tax authorities before completing a finance transaction?

Circumstances for obtaining clearance

See below, Procedure for obtaining clearance.

Mandatory or optional clearance?

See below, Procedure for obtaining clearance.

Procedure for obtaining clearance

The South African Revenue Service (SARS) may issue binding class rulings and binding private rulings upon application. An application for a binding private ruling can be made by a party to a proposed transaction, whereas an application for a binding class ruling is made by a legal person (person) on behalf of a class.

The purpose of the rulings system is to promote clarity, consistency and certainty regarding the implementation of, and application of a tax Act.

If a ruling applies to a person, then SARS must apply the applicable tax in accordance with the ruling. A ruling will apply if:

  • The provision of the Act at issue is the subject of the advance ruling.

  • The set of facts or the transactions are the same as the particular set of facts specified in the ruling.

  • The set of facts or transactions fall within the effective period of the ruling.

  • The assumptions or conditions imposed by SARS in connection with the ruling have been satisfied.

  • In the case of a binding private ruling the person is an applicant identified in the ruling.

  • In the case of a binding class ruling the person is a "class member" identified in the ruling.

Disclosure of finance transactions

3. Is it necessary to disclose the existence of any finance transactions to the tax authorities?

Circumstances where disclosure is required

A taxpayer will disclose its balance sheet and income statement items as part of the tax return. If additional information is required this is requested from the taxpayer by the South African Revenue Service (SARS).

Certain transactions, referred to as "reportable arrangements", must be disclosed to the SARS. Failure to do so may result in significant penalties for the taxpayer. Examples of reportable arrangements include:

  • A calculation of interest which is dependent on certain assumptions relating to the income tax treatment of the transaction.

  • A transaction which results in a deduction for income tax purposes but not for financial reporting purposes.

  • Transactions which result in income for financial reporting purposes but not for income tax purposes.

Manner and timing of disclosure

See above, Circumstances where disclosure is required.

 

Taxes on corporate lending/borrowing

Taxes potentially chargeable on amounts receivable

4. What are the main corporate taxes potentially chargeable on interest and other amounts receivable under a loan?

Corporate income tax

Key characteristics. Under South African law there are tax implications for interest received. Where there is any form of financial arrangement in terms of which a borrower undertakes to pay interest to a lender for a period exceeding 12 months, or to pay a premium on an instrument, or acquire the instrument at a discount, the following will result:

  • Borrower: incurral "spread" over the term of the instrument.

  • Lender: accrues income "spread" over the term of the instrument.

Calculation of tax. The amount of interest accrued to the taxpayer is effectively spread over the term of the financial arrangement by compounding the interest over fixed accrual periods using a predetermined rate referred to as a "yield to maturity". The interest accrued is included in the gross income of the taxpayer.

Triggering event. Any form of financial arrangement in terms of which a borrower undertakes to pay interest to a lender for a period exceeding 12 months.

Applicable rate(s). The rate is included in the gross income of the taxpayer.

Tax reliefs available for borrowing costs

5. What corporate tax reliefs are available for borrowing costs (including interest and other amounts payable under a loan)?

Corporate income tax relief

Key characteristics. Under South African law there are tax implications for interest paid. Where there is any form of financial arrangement in terms of which a borrower undertakes to pay interest to a lender for a period exceeding 12 months, or to pay a premium on an instrument, or acquire the instrument at a discount, the following will result:

  • Borrower: incurral "spread" over the term of the instrument.

  • Lender: accrues income "spread" over the term of the instrument.

Calculation of relief. The amount of interest accrued to the taxpayer is effectively spread over the term of the financial arrangement by compounding the interest over fixed accrual periods using a predetermined rate referred to as a "yield to maturity". The interest incurred is deducted from the income of the taxpayer.

Triggering event. Any form of financial arrangement in terms of which a borrower undertakes to pay interest to a lender for a period exceeding 12 months.

Applicable rate(s). The interest incurred will be deducted from the income of the taxpayer.

Tax payable on the transfer of debt

6. What corporate, transfer, stamp or other taxes are payable on the transfer of a debt under a loan?

Stamp duty

There are no stamp duties on the transfer of a debt.

Capital gains tax

Key characteristics. The lender is subject to capital gains tax on the disposal, or transfer of the debt receivable.

Calculation of tax. Capital gains tax for the lender is calculated on the proceeds received upon the disposal of the asset, less the base cost of the asset (that is, the face value of the loan).

Triggering event. Capital gains tax is triggered by the disposal, or the transfer of a debt receivable for proceeds by the lender.

Liable party/parties. The lender is liable in the case of a disposal of a debt receivable.

Applicable rate(s). Any capital gain or loss is included in the taxpayer's aggregate capital gain or aggregate capital loss for the year of assessment. The amount by which the aggregate capital gain for the year of assessment exceeds the capital loss of the previous year of assessment is included in the taxable income of the taxpayer and effectively taxed at a rate of 18.65%.

Corporate income tax

Key characteristics. Where the borrower transfers/delegates its debt it may be required to make certain tax adjustments, which will be included in the taxpayer's income.

Calculation of tax. The borrower must account for an adjusted gain or loss in terms of section 24J(4) of the Income Tax Act 1962.

Triggering event. Tax is triggered by the delegation of a debt by the borrower.

Liable party/parties. The borrower is liable in the case of a delegation of debt.

Applicable rate(s). The adjusted gain or loss is included in the income of the taxpayer and effectively subject to tax at the corporate tax rate of 28%.

Withholding tax

7. Is there withholding tax on interest or any other payments under a loan?

Under South African law there is withholding tax on interest under a loan.

When withholding tax applies

Withholding tax is payable on the amount of any interest paid for the benefit of a foreign person.

Applicable rate(s) of withholding tax

The rate of withholding tax is 15% on the amount of interest paid, subject to the relevant double taxation agreement between South Africa and the other contracting state, which may lower the withholding tax rate.

Exemptions from withholding tax

The following are exempt from withholding tax on interest:

  • Interest paid to a foreign person by the government of the Republic, or any South African bank under certain circumstances.

  • Interest paid to a foreign person by a headquarter company in respect of the granting of financial assistance.

  • Interest paid in respect of a listed debt.

  • Interest paid to a foreign company if the debt claim in respect of which that interest is paid is effectively connected with a permanent establishment of that foreign person in the Republic.

For a comparative summary of withholding tax on interest, see table, Withholding tax on interest on corporate debt, in this multi-jurisdictional guide.

Guarantees

8. Do any particular tax issues arise on the provision of a guarantee?

There are no tax implications that arise on the provision of guarantees.

 

Bond issues

9. For corporate taxation purposes, are bonds treated any differently from standard corporate loans?

The tax treatment of bonds is similar to corporate loans (see Questions 4 and 5).

Taxes payable on the issue and/or transfer of a bond

10. What stamp, transfer or similar taxes are payable on the issue and/or transfer of a bond?

Under South African law there are no tax implications on the issue of a bond. However capital gains tax or corporate income tax may be payable on the transfer of a bond.

Capital gains tax

Key characteristics. If an investor disposes/transfers a bond, it is subject to capital gains tax if the bond was held as a capital asset in the hands of the investor.

Calculation of tax. The capital gains tax on the disposal of the asset is calculated as the proceeds on the disposal less the base cost of the asset (that is, the face value of the bond).

Triggering event. The transfer or disposal of the bond triggers the tax.

Liable party/parties. The investor is subject to capital gains tax on the proceeds derived from the disposal of the bond.

Applicable rate(s). Any capital gain realised is included in the taxable income of the taxpayer and is effectively taxed at 18.65%.

Corporate income tax

Key characteristics. Where the taxpayer is involved in the business of buying and selling bonds with the intention of realising profits, any profits on the disposal of the bond by the investor will effectively be taxed at the corporate tax rate which is currently 28%.

Calculation of tax. Profits on the disposal of the bond are taxed at the corporate tax rate.

Triggering event. The transfer or disposal of the bond triggers the tax.

Liable party/parties. The investor is subject to corporate income tax on the proceeds derived from the disposal of the bond.

Applicable rate(s). As the profit realised is revenue in nature, it is subject to tax at a rate of 28%.

Exemptions

11. Are any exemptions available?

If the transfer/disposal of the bond qualifies for group-relief, the capital gains tax and/or corporate income tax implications will be deferred.

 

Plant and machinery leasing

Claiming capital allowances/tax depreciation

12. What are the basic rules for enabling the lessor or lessee of plant and machinery to claim capital allowances/tax depreciation?

If the taxpayer is the owner of the asset or if the taxpayer acquired the asset by way of an instalment credit agreement, it is eligible to claim the allowances.

Rate of capital allowances/tax depreciation

13. What is the rate of capital allowances/tax depreciation; does it depend on the type of assets?

Capital allowances are dependent on the type of industry:

  • Allowances in respect of machinery, plant, implements and utensils used in farming or in the production of renewable energy are calculated as:

    • 50% of the cost in the year that the asset is brought into use;

    • 30% of the cost in the second year; and

    • 20% of the cost in the third year.

  • Allowances in respect of assets used by manufacturers or hotelkeepers in respect of aircrafts and ships and in respect of assets used for storage and packing of agricultural products: 20% of the cost to the taxpayer for the year of assessment during which the asset is brought into use and four succeeding years thereafter.

  • Allowances in respect of certain pipelines, transmission lines and railway lines: 10% or 5% of the cost of the asset, depending on the type of asset.

Lessees not carrying on business in the jurisdiction

14. Are there special rules for leasing to lessees that do not carry on business in your jurisdiction?

The supply (being movable goods) is zero rated for VAT purposes to the extent that the goods are used exclusively in an export country and the payment of the rent is effected from the export country.

Taxation of rentals

15. How are rentals taxed?

The lessor (if a resident of the Republic) is subject to tax on all receipts and accruals, including rental income received. (If the lessor is a non-resident, it is subject to income tax on rentals received that are sourced from South Africa, subject to the application of the double taxation agreement.)

The lessee (if a resident of the Republic) is eligible to deduct the rental payments if incurred in the production of income.

Rulings and clearances

16. Is a ruling or clearance necessary or common?

The South African Revenue Service (SARS) may issue binding class rulings and binding private rulings upon application by the taxpayer.

 

Restructuring debt

Unpaid or deferred interest or capital

17. What is the tax treatment of the borrower and the lender if interest or capital is unpaid or deferred?

See Questions 4 and 5 for the tax implications in respect of interest accrued or incurred.

Debt write-off/release and debt for equity swap

18. What is the tax treatment of the borrower and lender if a loan is:
  • Written off or released (wholly or partly)?

  • Replaced by shares in the borrower (debt for equity swap)?

Borrower

If the debt is written off, the borrower may be required to account for an adjusted gain or loss in its income.

Where the borrower's debt is reduced, and such debt was used to fund any expenditure in terms of which a deduction or an allowance was granted, or where it was used to acquire an asset, there may be certain corporate income tax and capital gains tax consequences for the borrower.

The mechanism by which the debt is set-off by the issuance of shares in the borrower, will not give rise to adverse tax implications for the borrower, provided that this process is implemented correctly.

Lender

The lender may be eligible to claim an allowance in respect of debts that have gone bad during the year of assessment, provided that such amounts were included in the income of the lender either in the current or the previous year of assessment.

Where the lender carries on the business of a moneylender, any expenditure and/or losses (that is, the write off of any debt) incurred in the production of its income may be deducted for corporate income tax purposes.

The mechanism by which the debt due to the lender is set-off by the issuance of shares in the borrower, will not give rise to adverse tax implications for the borrower, provided that this process is implemented correctly.

 

Securitisation

19. Briefly explain the key features of the tax regime applicable to securitisations, including details of any specific tax rules that apply or issues that arise in relation to securitisations.

There is no tax regime that regulates the treatment of securitisation issues and therefore the general tax principles are applied to securitisations.

 

Foreign Account Tax Compliance Act (FATCA)

20. Has your jurisdiction entered into an intergovernmental agreement (IGA) to implement FATCA, or do you intend to enter into an IGA to implement FATCA?

South Africa has entered into an IGA with the USA. The IGA will improve international tax compliance by ensuring that financial institutions in South Africa report information about USA account holders to the South African Revenue Service (SARS). SARS in turn will relay that information by way of automatic exchange of information to the Internal Revenue Service (IRS) of the USA.

 
21. Have there been any particular difficulties in light of your jurisdiction's domestic legislation with implementing the FATCA requirements?

The IGA has overcome most of the practical difficulties of reporting private data directly to the Internal Revenue Service (IRS).

 
22. Are there any provisions of your jurisdiction's IGA and/or domestic implementing legislation, if any, that are more onerous than the US FATCA requirements?

There are no provisions of South Africa's IGA or domestic implementing legislation that are more onerous than the US FATCA requirements.

 

Bank levies

23. Are there any bank levies or similar taxes imposed specifically on financial institutions?

There are no bank levies or similar taxes imposed specifically on financial institutions.

 
24. On what are any such levies or taxes charged?

Not applicable.

 
25. At what rate(s) are the levies or taxes charged?

Not applicable.

 
26. Are there any thresholds or exemptions?

Not applicable.

 

Reform

27. Please summarise any proposals for reform that will impact on the taxation of finance transactions described above.

Currently the outcome of the OECD BEPS analysis is being reviewed by the Davis Tax Committee. In addition the committee will also review VAT, mining companies and insurance companies.

 

Online resources

The South African Revenue Service (SARS)

W www.sars.gov.za

Description. Official website of the SARS. Content is available in English.



Contributor profiles

Andrew Wellsted

Norton Rose Fulbright

T +27 11 685 8809
F +27 11 301 3200
E Andrew.Wellsted@nortonrosefulbright.com
W www.nortonrosefulbright.com/za/

Professional qualifications. South Africa, Attorney (BA,1996; LLB,1998; LLM (Tax) 2002)

Areas of practice. South African tax and exchange control.

Elana Ross

Norton Rose Fulbright

T +27 11 685 8846
F +27 11 301 3200
E Elana.ross@nortonrosefulbright.com
W www.nortonrosefulbright.com/za

Professional qualifications. CA (SA) 2013 (Bcom 2008, Bcom (Hons) 2009)

Areas of practice. South African tax and international tax


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