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Changes to the way in which Collective Investment Schemes will be taxed

3 June and 2 September 2009
Esmari van de Vyver

The Taxation Laws Amendment Bill, 2009 issued on 1 September 2009 contains several far-reaching implications for Collective Investment Schemes (CIS) in securities:

A CIS will no longer be regarded as a company for tax purposes, except for the connected person definition and reorganisation rules.
For the purposes of the new dividend withholding tax, a CIS is a regulated intermediary and it is assumed that all income will be distributed within 12 months.
The CIS will have to withhold and pay the new dividend tax over to SARS. This will require excellent record keeping with regards to the legal form and tax residence of the investors in the CIS and whether the companies paying the dividends are tax resident in South Africa or not.
If dividends received from South African companies are not distributed within 12 months, the CIS must pay dividend withholding tax over to SARS as if it did distribute all of those dividends to South African individuals. This means that any relief that investors which are companies may have received, will be lost.
Income received and distributed by the CIS will retain its nature. The CIS will therefore make calculations to split distributions into local dividends, foreign dividends and interest on the same pro-rata basis as it was received.
The CIS itself will no longer be able to claim credit for foreign taxes paid. This means that investors will have to be supplied with enough information to claim their share of all foreign taxes paid by the CIS in their own tax return.
If the CIS is no longer regarded as a company for tax purposes, foreign jurisdictions will require the CIS to provide detail on the tax residence and legal form of all investors for the purposes of calculating foreign withholding taxes. If the CIS is unable to provide such detail, the foreign jurisdiction is likely to withhold the maximum rates (rather than the reduced rate agreed upon in the double tax agreement), resulting in reduced returns and a loss for the South African fiscus. For example, the United Kingdom levies a withholding tax of 20% on interest paid to foreign companies, but in terms of the double taxation agreement between the United Kingdom and South Africa the rate has been reduced to zero.

On 9 December 2009 the OECD issued a Public Discussion Draft on The Granting of Treaty Benefits with respect to the Income of Collective Investment Vehicles that is relevant to the issues discussed above.

Copyright © 2009 Esmari van de Vyver