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South Africa: Low or interest-free loans, companies held by trusts

South Africa: Low or interest-free loans

Measures are being proposed to tighten the rules for structures or transactions that include low-interest or interest-free loans to companies held by trusts.


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The anti-avoidance provision of section 7C of the Income Tax Act No. 58 of 1962 imposes a “donations tax” charge at a rate of 20% on interest that is foregone in respect of certain loans. The foregone interest is calculated as the difference between the official rate of interest (currently 7.5%) and the interest (if any) charged on the loans. The measure also applies the rules of section 7C to low-interest or interest-free loan funding provided to a trust or a company, when at least 20% of the equity shares are owned, or voting rights can be exercised directly or indirectly, by the trust or beneficiary of the trust—a “20% participation rule.” 

Draft legislation, released in July 2018 for public comment, would extend the 20% participation rule effectively to reach 20% of the shares or voting rights in the company receiving the loan if held individually or collectively by a trust and any connected person to the trust. The definition of a “connected person” in respect of a trust would be broad. 

The proposed amendment would be effective retroactively as of 19 July 2017 in respect of any amount owed by a trust or a company in respect of a loan, advance or credit provided to that trust or to that company before, on, or after that date. 

KPMG observation

Any form of relationship to a trust would need to be reviewed to determine whether any loans made to trusts, or to companies owned by trusts or beneficiaries of such trusts, would be subject to the deemed donation implications of the anti-avoidance provision.


Read an August 2018 report [PDF 116 KB] prepared by the KPMG member firm in South Africa

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