South Africa: Tax exposure in respect of derivative income earned by non-residents

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

South Africa: Tax exposure in respect of derivative income earned by non-residents

dachs.jpg

Peter Dachs

South Africa taxes a resident, as defined in the Income Tax Act, on its worldwide income. A South African resident is defined in section 1 of the Income Tax Act as a person (other than a natural person) which is incorporated, established or formed in the Republic or which has its place of effective management in the Republic, but does not include any person who is deemed to be exclusively a resident of another country for purposes of the application of any double taxation agreement entered into by South Africa.

Any person who does not constitute a resident as defined in the Income Tax Act is subject to South African income tax on income which is from a source within South Africa or deemed to be from a South African source, subject to relief provided in terms of the relevant double tax agreement, if any.

As from January 1 2012, the tax code contains a statutory definition of "source" in respect of certain forms of income in section 9 of the Income Tax Act.

However, section 9 of the Income Tax Act does not address the source of derivative income such as manufactured dividends.

If certain items of income are not specifically dealt with in section 9(2) of the Income Tax Act, it is then necessary to consider whether the general principles relating to source apply to such items of income.

On this basis our courts have held that the term source means the "originating cause of income being earned". In CIR v Lever Brothers and Unilever Limited (14 SATC 1) the court stated that that the enquiry into "originating cause" has two steps, namely what was the originating cause of the income and furthermore, where was that originating cause located.

Two aspects which are relevant for determining the source of a non-resident's income are: (i) whether its business is carried out in South Africa; or (ii) whether its capital is employed in South Africa.

A number of factors could contribute to a non-resident earning derivative income. It is therefore possible that income can have more than one source, some of which may be within and others outside of South Africa. Where there appears to be more than one source, the traditional approach has been to seek the real, main or dominant cause of the income (CIR v Black 21 SATC 226).

However, there is also case law dealing with the apportionment of income.

Many items of derivative income do not fall within the ambit of section 9 of the Income Tax Act. It is therefore necessary to test whether these amounts are, in terms of general source principles, derived from a source within South Africa.

In respect of various items of income there is clear case law in respect of the source of such income. This applies in respect of, for example, dividends declared on shares issued by a South African company as well as rental payments, service payments and the source of income from the sale of shares. However in respect of derivative payments there is no applicable case law. To determine whether a non-resident which earns derivative income has an exposure to South African tax, it is therefore necessary to test whether such non-resident carries out business operations in South Africa or employs capital in South Africa.

Peter Dachs (pdachs@ensafrica.com)

ENSafrica – Taxand Africa

Tel: +27 21 410 2500

Website: www.ensafrica.com

more across site & shared bottom lb ros

More from across our site

Heads of tax need to push their teams forward as strategic business advisers to add value across the organisation, says Sandy Markwick
Scott Bessent reportedly felt undermined by Musk naming Gary Shapley as acting IRS commissioner; in other news, Baker Tilly will combine with a top 15 US firm
The promise of nine years’ tax certainty and a ‘rational and pragmatic’ government process makes APAs a no-brainer, Indian tax advisers tell ITR
Despite garnering significant revenues from multinationals, Italy’s digital services tax presents pressing double taxation issues, say Stefano Simontacchi and Francesco Saverio Scandone of BonelliErede
ITR’s research shows that in-house tax counsel in Asia also feel underserved by their advisers’ international networks
World Tax global head of research Jon Moore tells ITR how his team spots standout submissions, and gives early statistical insights into this year’s entries
Australia’s conservative opposition will repeal controversial tax agent reporting rules if elected in the country’s May general election
Shapley would be the fourth person to hold the job this year; in other news, UK tax advisory firm MHA raised fewer funds than expected from its London IPO
The US needs to be involved in pillar one for there to be more international acceptance of the project, Michael Masciangelo says
The UK regulator is investigating EY’s auditing of the national postal service as it relates to the high-profile Horizon scandal, which saw hundreds wrongfully convicted
Gift this article