Taxation of dividends payable by a South African company to a Cypriot shareholder
SARS may now impose a dividends tax on dividends paid by a South African company to a Cypriot shareholder as provided for in the Protocol to the current agreement for the avoidance of double taxation between South Africa and Cyprus.
In terms of the current agreement for the avoidance of double taxation between South Africa and Cyprus, Cyprus has the exclusive taxing right in respect of dividends paid by a South African company to a Cypriot shareholder, provided that such a shareholder is the beneficial owner of such dividends. This, together with the fact that Cyprus is renowned as a low-tax jurisdiction, has resulted in the establishment of international share ownership structures where the beneficial ownership of shares in South African companies is held by Cypriot shareholders to ensure that dividends paid do not attract dividends tax in South Africa.
The Protocol to the agreement between South Africa and Cyprus was published on April 1 2015. The South African Parliament has already ratified the Protocol, and it has been referred to Cyprus to commence with its ratification process. Once ratified by Cyprus, which is likely to be in the next few months, the Protocol will become effective.
The Protocol provides, from a South African tax perspective, that SARS may now impose a dividends tax on dividends paid by a South African company to a Cypriot shareholder. The rate of dividends tax is either 5 per cent or 10 per cent of the gross amount of dividends paid, depending on the percentage shareholding the Cypriot shareholder holds in the South African company and subject to a limited number of exclusions.
What is of concern, however, is that the Protocol provides that the provisions contained therein shall apply from the date of the introduction in South Africa of the system of taxation at shareholder level of dividends declared, which is April 1 2012. The effect of this is that the imposition of dividends tax, at the newly prescribed rates, will operate retrospectively from April 1 2012, thereby affecting all dividends declared by a South African company to a Cypriot shareholder for the past 40 months.
It is unclear how SARS intends to effect this retrospective operation of the imposition by South Africa of dividends tax on Cypriot Shareholders in practice. Are Cypriot shareholders required to register as taxpayers in South Africa and declare and pay dividends tax in respect of all dividends received from April 1 2012? Is it envisaged that SARS will pursue the collection of dividends tax against the Cypriot shareholders to recover the tax due? Will the Cypriot shareholders be liable for any penalties and interest owing to their failure to pay the tax due to SARS “by the last day of the month following the month during which that dividend is paid,” as is required in the Income Tax Act?
From a strict interpretation of the Protocol and the Income Tax Act, because the beneficial owners of the dividends are liable for the dividends tax under section 64EA(a) of the Income Tax Act, they would be required to declare and pay the dividends tax not withheld since April 1 2012. Accordingly, SARS’ primary claim for the recovery of the unpaid dividends tax (including interest and penalties) would be against the past or present Cypriot shareholder and, without stating the obvious, this liability may very well be overlooked by the shareholders who are unlikely to, in any event, be registered for tax in South Africa.
It is, however, common knowledge that foreigners who are liable for withholding taxes in South Africa generally do not really bother and/or do not cooperate with the South African withholding agents bearing the duty to withhold the tax, on the premise that such withholding agents carry the responsibility to ensure that tax is correctly withheld. This is particularly noticeable where the withholding agent is subject to a tax gross-up requirement where it bears the liability for any withholding taxes imposed. This places the withholding agents in a somewhat difficult situation, having themselves to first ascertain whether the foreigner is liable for the withholding tax in terms of the Income Tax Act and, if so, whether it is subject to a reduced rate, followed by having to convince the foreigner to submit a valid Declaration and Undertaking to ensure that a reduced withholding tax rate is applied. In effect, this means that the burden to withhold tax in South Africa is on the withholding agent, albeit the tax liability is that of the foreign shareholder.
The significance of the withholding agent is obviously also recognised by the South African legislature, as section 157 of the Tax Administration Act (TAA) is clear that the withholding agent (who is any person who must under a tax Act withhold an amount of tax and pay it over to SARS) will be held personally liable for the tax (which is defined in section 1 of the TAA to include interest and penalties) which should have been withheld under a tax Act but was not so withheld. In terms of section 160 of the TAA, the withholding agent who pays the tax is then entitled to recover the amount so paid from the person on whose behalf it is paid.
What is therefore more significant is how the South African companies, in their capacity as withholding agents, are to treat the retrospective operation of the Protocol. In this regard the key question is whether the South African companies are expected by SARS to recover the tax due from the Cypriot shareholders and pay it over to SARS. Alternatively, can they be held liable for the withholding tax in respect of the dividends paid to the Cypriot shareholders, which they have (by no mistake of their own) failed to withhold? Will SARS impose penalties and interest on the South African withholding agent should it fail to take cognisance retrospectively of the operation of the Protocol and not pay the tax due?
SARS has published on its website that “the person liable for the tax … remains ultimately responsible to pay the tax should the withholding agent fail to or withhold the incorrect tax”. Presumably it can be inferred therefrom that any penalties and interest levied for non-payment or late payment of dividends tax will be imposed on the Cypriot Shareholder and not the South African company. The TAA, however, offers a much easier approach to SARS, namely to recover the unpaid dividends tax, interest and penalties from the South African withholding agents, and leave it to them to recover such amounts from their shareholders by virtue of the statutory right of recovery afforded to them in terms of section 160 of the TAA.
What must be explained to the South African withholding agents is that the position is not clear. For example, what is the position if the Cypriot shareholder is no longer a shareholder or no longer in existence? Would there be an argument that the tax liability has prescribed or, even further, is there a constitutional argument based on the prohibition of laws which apply retrospectively?
Due to the significant financial impact of, and the confusion in respect of, the details pertaining to the administrative requirements relating to retrospective implementation on dividend withholding tax, it is vital that SARS provides clarity to South African withholding agents prior to the ratification of the Protocol.
