Paying a dividend without dividends tax
When a South African company can pay a dividend without withholding dividends tax, the shareholder declarations it must hold, and their five-year limit.
By Achekam · · 4 min read · For Running a business businesses in South Africa
A family company declares a dividend to its shareholders: two individuals, a family trust and a holding company. The bookkeeper withholds dividends tax from all four, because that is what was done last year. One shareholder's accountant phones the next week to ask why tax was withheld when the shareholder is exempt.
The answer is usually paperwork. A company may pay a dividend without withholding, or at a reduced rate, but only when it holds the right declaration from the shareholder. Without it, the company withholds at the full rate. This guide explains how exemptions and reduced rates work from the paying company's side, the declarations involved, how long they last, and what must still be reported.
The starting point: withholding at 20%
SARS says dividends tax is charged at 20% on dividends paid on or after 22 February 2017, unless an exemption or a reduced treaty rate applies. That is the rate at the time of writing.
SARS also says dividends tax is payable by the beneficial owner of the dividend but withheld by the company or a regulated intermediary, except for a dividend in specie, where the company itself is liable. So for an ordinary cash dividend, the company is the collector, not the taxpayer, and the question of exemption is really a question about the shareholder.
Exemptions and reduced treaty rates
Some shareholders are exempt from dividends tax, and some foreign shareholders qualify for a reduced rate under a tax treaty. SARS's dividends tax page explains who bears the tax, how it is withheld, the exemptions, and reduced rates under tax treaties. Use it to check whether a particular shareholder can qualify, rather than relying on how the shareholder was treated in the past.
The important point for the paying company is that an exemption is not applied on assumption. A shareholder who believes it is exempt has to tell the company so in the form the rules require.
The shareholder's declaration and undertaking
That form is a declaration and undertaking from the shareholder: the shareholder's own statement of why the exemption or reduced rate applies to it, given to the company in writing. The company holds it, and relies on it, when deciding not to withhold or to withhold at a lower rate.
In practice:
- ask every shareholder, before the first dividend, whether it claims an exemption or reduced rate;
- obtain the declaration and undertaking from those that do;
- withhold at the full rate from anyone who has not provided one; and
- keep the declarations with the dividend records.
A worked example in words: of the four shareholders in the family company above, the holding company provides a declaration and undertaking claiming an exemption, and the others provide nothing. The company pays the holding company its dividend in full and withholds at 20% from the other three. If the trust later provides a valid declaration, the company applies it to dividends paid after it is received.
Five-year limits on declarations
Declarations do not last forever. SARS says that from 1 July 2020, a shareholder's declaration and undertaking for a dividends tax exemption or reduced rate may be limited to five years, after which a new declaration may be needed.
That means a declaration on file is not proof of exemption indefinitely. Record the date each declaration was received, and diarise a review well before five years have passed, so you can ask for a fresh one before the next dividend rather than discover the gap on the day of payment.
Reporting exempt dividends paid
An exempt dividend is not invisible. SARS says that from 17 January 2019 only the payment side of exempt dividends must be reported, and the receipt of exempt dividends no longer needs to be reported to SARS.
For the paying company, that means exempt dividends still appear in its dividends tax reporting, even though no tax was withheld. The receiving shareholder no longer reports receiving them. Withholding and paying dividends tax covers the returns and the payment deadline.
Filing declarations and recording the dividend
The declarations are the company's evidence, so they need to be easy to find. Achekam's Document Centre is a folder-based store where a business uploads files or whole folders, then previews, downloads, renames, moves, tags, archives and searches them. When a shareholder provides a new declaration, uploading it as a new version keeps the earlier ones, so the history of each shareholder's position stays on record. A tag with the date received makes the five-year review simple.
In the books, a business can post manual journals to record the dividend declared, the amounts withheld and the amounts paid to each shareholder. An unbalanced journal, or one dated in a closed month, is refused, and a posted journal is corrected only by a reversal. Dividend resolutions and declarations are also part of the company's statutory record; see records a company must keep.
Before each dividend
- List the shareholders and their status.
- Check which have a declaration and undertaking on file, and when each was received.
- Ask for new declarations where one is missing or approaching five years.
- Withhold at 20% from any shareholder without a valid declaration.
- Report exempt dividends paid, as well as dividends with tax withheld.
The declaration is the difference between withholding and not withholding. Hold it before the dividend is paid, and the payment run becomes straightforward.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
