General info..
5.1.3 FOREIGN DIVIDENDS:
• The amount in respect of ‘Gross foreign dividends subject to SA normal tax’ must
be inserted next to source code 4216. The exemption in terms of section 10B(3) on
foreign dividends subject to SA normal tax will be applied programmatically by SARS.
The exemption is calculated in terms of the formula A = B x C (ratio of 25/40).
• Foreign tax credits on such foreign dividends: If any withholding tax was paid on
the foreign dividend received, this amount will appear on the certificate received from
the institution administering the investment. The gross amount of withholding tax must
be declared next to source code 4112.
Foreign dividends
The tax rate for foreign dividends is determined according to a formula and will depend on the actual marginal rate of the taxpayer and can therefore be less than the maximum effective rate of 15%. A taxpayer who receives foreign dividends must also include the gross amount of the foreign dividends (total amount of foreign dividends gross of any foreign withholding taxes) in his or her tax return.
Foreign dividends are however in most cases (unless the shareholder holds more than 10% of the issued shares in the foreign company) subject to a partial exemption. This exemption is calculated by using the following formula: 25/40 x gross foreign dividends.
By way of example, assume Mr X received the currency equivalent of R1 000 000 (gross) in foreign dividends. His foreign dividends were however also subject to the currency equivalent of R150 000 in foreign withholding taxes already deducted from the dividend payment. His net receipt was therefore R850 000. If Mr X also received, for example, R1 000 000 from an SA living annuity, the following will apply:
Include the full R1 000 000 living annuity as gross income.
Include the full R1 000 000 foreign dividend as gross income.
Total gross income = R2 000 000
Apply the foreign dividend exemption against the gross foreign dividend income – 25/40 x R1 000 000 = R625 000. R1 000 000 – R625 000 = R375 000.
His taxable income will therefore be the gross living annuity receipts (R1 000 000) plus the taxable foreign dividend amount of R375 000 = R1 375 000.
This is then taxed according to the tables and for this income level the taxable amount plus the marginal rate for this tax year is R185 205 + 40% of the amount above R638 600 = R479 765.
Total tax payable = R479 765 (R150 000 of this represented by the foreign dividends and ignoring any SITE/PAYE that may have been withheld on the living annuity).
Therefore, his effective rate on the foreign dividends is 15% (before rebates). The effective tax rate will therefore vary depending on the actual marginal rate applicable.
An amount of R150 000 has however already been withheld in the foreign jurisdictions as foreign dividend tax and this can be applied as a credit against the actual tax payable:
R479 765 – R150 000 = R329 765
His total South African tax payable is therefore R329 765.
Equally, if there was no foreign dividend withholding tax or an amount of less than the SA tax liability withheld on the foreign dividends, the foreign dividends would attract local taxation either in full or on the difference between the lesser amount of tax suffered in the foreign jurisdiction and the SA tax payable.
