An analysis by ENS Africa, Taxand South Africa

 

When a South African resident receives a distribution from a foreign subsidiary, it’s crucial to determine if it is a “foreign dividend” or a “foreign return of capital” to understand the tax implications.

 

  • Foreign Dividend: Typically exempt from income tax if certain conditions are met (e.g., holding at least 10% of the foreign company).
  • Foreign Return of Capital: Requires reducing the base cost of the shares. If the distribution exceeds the base cost, it results in a capital gain, which may also be exempt under specific conditions.

Proper classification involves understanding the tax laws of the foreign subsidiary’s country and consulting with advisors, with any misclassification potentially leading to incorrect tax treatment.

 

Nicolette Smit from ENS Africa, Taxand South Africa, has analysed these two classifications and their implications in more detail here.

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International Tax | South Africa | Tax

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