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.
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.
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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