South Africa: Effects of reduced corporate income tax rate on investors in REITs

The corporate income tax rate would be reduced to 27% for companies with years of assessment beginning on or after 1 April 2022.

Effects of reduced corporate income tax rate on investors in REITs

The Minister of Finance in February 2021 announced that the corporate income tax rate would be reduced to 27% (from 28%) for companies with years of assessment beginning on or after 1 April 2022. However, the rate reduction has yet to be enacted.

The reduction in the statutory corporate income tax rate would be accompanied by a broadening of the corporate income tax base by limiting interest deductions and assessed losses.

Initially, it would appear that the reduced corporate income tax rate would be a substantial benefit to all companies and their investors. However, investors in companies such as real estate investment trusts (REITs) may not be in the same after-tax position, with regard to the dividends received, as investors in non-REIT companies. 

How corporate income tax rate reduction may affect individual investors in REITs

REITs—investment vehicles enabling investors to receive rental income in a safe, easy, and affordable way—are subject to section 25BB of the Income Tax Act providing that if a REIT meets all criteria, there is an income tax deduction in respect of qualifying distributions declared and paid to investors. The REIT effectively operates as a conduit through which net property income flows to the ultimate investor so that the investor is taxed (and not the REIT).

Due to tax neutrality, there is an argument that the planned change in the corporate income tax rate may negatively affect certain investors, for example individual investors, in a REIT.

Individuals in South Africa are taxed on a sliding scale in accordance with the level of taxable income earned. Unlike dividends received from non-REIT companies, individuals do not receive an exemption on the dividends received from a REIT. As such, the full dividend received from a REIT is included in the taxable income of an individual and is taxed at the individuals marginal tax rate. In comparison, dividends received from other (non-REIT) companies by individual investors are exempt from income tax as they have already been taxed at the corporate income tax rate, and the dividend will be subject to a 20% dividends tax (which is in fact a tax on the investor).

Thus, there could be an issue that individual investors in REITs are not able to receive the benefit of the reduction in the corporate income tax rate due to the type of company that they have invested in.

Read a February 2022 report [PDF 603 KB] prepared by the KPMG member firm in South Africa

 

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