Should withholding tax on interest (WTI) be deducted from a distribution of interest income to a non-resident beneficiary of a South African discretionary trust?

As from 1 March 2015, interest paid by any person, from a source within South Africa, to or for the benefit of a foreign person (which includes individuals, companies or trusts), became subject to a withholding tax (WTI). The WTI provisions are set out in sections 50A to 50H of The Income Tax Act.

This tax is a final withholding tax at a rate of 15% unless an applicable Agreement for the Avoidance of Double Taxation between South Africa and a foreign resident’s country reduces the rate South Africa is allowed to charge or denies South Africa the right to tax interest payments. These Double Taxation Agreements (DTA’s) should be consulted as a matter of course prior to paying any interest to a non-resident.

Should relief be sought in terms of a DTA then prior to paying the interest a WTD – Withholding Tax on Interest Declaration should be obtained from the recipient.

EXEMPTIONS

There are exemptions in respect of The WTI which fall into three broad groups.

Payer:

An amount of interest is exempt if it is paid by –

  • The Government of South Africa or
  • Any South African bank or
  • A headquarter company where the headquarter company directly or indirectly holds 10% of the equity and voting rights

Instrument:

The amount of interest is exempt if it is:

  • Paid in connection with a listed debt or
  • Interest payable to any foreign person that is a client, to whom a regulated provider provides securities services, acts as an agent for another person about those services in which case it will include the agent or exclude the other person, if the contractual arrangement between the parties shows this to be the intention.

The categories above based on the payer and the instrument do not require the WTD – Withholding Tax on Interest Declaration to be completed and sent to the payer before payment of the interest  free of withholding tax.

Foreign recipient:

A foreign recipient is exempt from WTI if:

  • The recipient is a natural person who was present in South Africa for more than 183 days in total during the 12 months before the date on which the interest is paid or
  • The debt claim for which interest is paid is effectively connected with a permanent establishment of the foreign person who is registered as a taxpayer in South Africa.

This exemption category requires the completion of the WTD – Withholding Tax on Interest Declaration and the submission thereof to the payor of the interest before the interest is paid in order that the exemption may apply. 

Payment of WTI is made via eFiling and a Return for Withholding Tax (WT002) must be submitted to the South African Revenue Service (SARS) before the end of the month after the month in which the interest is paid.

In addition to this declaration, a reconciliation summary of all the WTI payments for the year should be reported on by means of an IT 3(b). The first reporting period was due by the end of May 2016 for the 12 month period ending February 2016.

Non-resident beneficiary of a South African Resident Trust

Since the introduction of WTI there has been some debate within the tax community on whether the withholding tax on interest is applicable to non- resident beneficiaries of a South African Trust when  interest income is distributed to a  non-resident discretionary beneficiary.

The view of the SARS is as follows:

“A borrower who pays interest to a resident discretionary trust will not have a withholding obligation since the borrower is not paying interest to a non-resident.

If the trustees exercise their discretion to vest the interest derived during a year of assessment in a non-resident beneficiary during the same year of assessment as it accrues to the trust, the withholding obligation will fall on the trust. Section 25B deems the interest to be received by or accrued to the non-resident beneficiary so logically the trust must be regarded as having paid that interest to the beneficiary.”

When a non-resident beneficiary has a pre-existing vested right to the interest, the withholding obligation falls on the person paying the interest and not on the trust. Section 25B does not apply because the interest does not accrue to the trust and is not beneficially received by it.In such cases the trust should advise the person paying the interest of the beneficiary’s non-resident status so that the person paying the interest is aware that they need to comply with the provisions of Sections 50A to 50H of The Income Tax Act.

Jo-Ann Dunning

Tax Manager, Durban

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