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South Africa: Proposed change to taxation of foreign dividends and gains by REITs

South Africa: Foreign dividends and gains by REITs

A proposal included in the Draft Taxation Laws Amendment Bill for 2020 would exclude real estate investment trusts (REITS) from application of the participation exemption rules.

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Background

The Income Tax Act currently provides for a participation exemption for taxpayers in respect of the receipt of a foreign dividend or the recognition of a capital gain arising from the sale of shares in a foreign entity.

The participation exemption exempts foreign dividends and capital gains from tax in South Africa, provided that the South African taxpayer holds at least 10% of the total equity shares and voting rights in the foreign company declaring the foreign dividend or at least 10% of the total equity shares in the foreign company subject to the disposal.

The specific provisions in section 25BB of the Income Tax Act (applicable to REITs and controlled companies) allow a REIT or controlled company to claim, as a deduction in determining its taxable income, distributions made to its shareholders, provided that all the requirements of the section are met. A REIT that receives a foreign dividend or realises a capital gain from the sale of shares in a foreign entity, may deduct these amounts from its taxable income to the extent that these amounts are distributed to its shareholders. This may result in a tax deduction in respect of a foreign dividend or foreign capital gain which was subject to the participation exemption. 

Proposed change

In order to avoid a situation when the REIT or controlled company  receives a benefit of claiming a deduction in respect of an amount that is not included in taxable income, it has been proposed to remove the benefit that a REIT or controlled company would be entitled to under the participation exemption. The proposed amendment would result in a tax-neutral position when the foreign dividends and capital gains are included in taxable income, with a corresponding tax deduction to the extent that these amounts are included in the distribution made to shareholders.

The proposed amendment is anticipated to be effective 1 January 2021 and would be applicable for years of assessment commencing on or after that date.


Read an August 2020 report [PDF 121 KB] prepared by the KPMG member firm in South Africa

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