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Foreign Investment Tax Treatment

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The below is only applicable if you are a South African Tax resident and have any of the below-mentioned income streams.

Foreign income consists of any earnings that did not originate in South Africa; meaning the property or investment is held within another country’s market or jurisdiction, and would consist of

Foreign investment income :

    • Dividends (Section 1) 
    • REITS (Section 2) 
    • Interest (Section 2)
    • Capital Gain/Loss on foreign investments (or investment properties – properties held for rental) (Section 3) 

Each of the above gets treated differently for South African Tax and must be converted to Rand value, based on the exchange rate as at 28/29 February (or the financial year end of a company).

 

1) Foreign dividends :

Foreign dividends are NOT exempt from South African tax.
For individuals, trusts and companies the treatment is the same except for the rates (shown below) used. Any foreign dividend tax paid is taken into consideration when calculating the tax payable on foreign dividends.
After converting the foreign dividend and applicable tax to rand value, deduct the tax from the gross dividend.

A special exemption is calculated based on this figure and whether the taxpayer is a person(individual), company or Trust.

The fraction used for each taxpayer type is as follows :

        • Individual : 25/45
        • Trust : 25/45
        • Company : 7/27 

Example :

Rand Value of Gross dividend = R150
Foreign tax in rand value = R25
Nett dividend  =  R125

To calculate the EXEMPT portion : 

  1. Individual and trust :
    R125 x 25 / 45 = R69.44
    Hence the taxable portion of the foreign dividend is :
    = R125 – R69.44
    = R55.56 – will be added to your taxable income.
  1. Companies :
    R125 x 7 / 27 = R32.41
    Hence the taxable portion of the foreign dividend is :
    = R125 – R32.41
    = R92.59 – will be added to the company’s taxable income.

 

2)  Foreign investment income :

The Rand Value is taxed, in full at the applicable tax rate (18%, 41%, etc) and any foreign tax paid, will have its Rand value deducted as a tax rebate.

 

3) Foreign Capital Gains and Loss

All values have to be converted to Rand Value

A Capital Gain or loss is calculated as follows :

    • Selling price less Base Cost.
      • We will not go into detail here on how different ways to calculate base cost, however the fundamental rule is :
        • Rental Property :
          • how much did purchase of the property cost you/the company?
          • How much were any additions (NOT repairs and maintenance)?
            • New warehouse or extra rooms built on.
            • Changing Carpets to Tiles is NOT an addition
        • Investments :
          • Your investment house/institution would have calculated this and does appear on the applicable certificate/report.
          • Foreign reports do not necessarily come in the South African standard and some adding up and subtracting would be required.
      • Commission and certain fees involved, can be added onto the base cost.
    •  
    • a) Foreign Capital losses :
      • are not added to any Local Capital Losses.
      • Should you have sold an investment, which was held within another country, and this sale resulted in a loss, then this Foreign Capital Loss will be put aside.
      • The Foreign Capital Loss can only be offset against other Foreign Capital Gains going forward.
      • A Local Capital Loss cannot be offset against a Foreign Capital Gain
      • A foreign capital loss cannot be offset against :
        • A Local Capital Gain (Gain on sale of an Allan Gray/PSG- Investment / Rental property held in South Africa)
        • Other foreign income (Dividends, rental, fees, etc)
    • b) Foreign Capital Gains : 
        • When the proceeds (what you/the company received for the property) is more than what you/the company paid for the property, then a Capital Gain originates.
          • The Foreign Capital Gain gets reduced by any Foreign Capital Losses
            • These Capital Losses will either be for the same tax year 
            • A Foreign capital loss brought forward from previous years
        • The Foreign Capital Gain that remains, gets added onto any Local Capital Gains.
          • For Individuals ONLY, the balance is reduced by the annual exclusion of R40,000
          • And then a potion (40% for individuals / 80% for companies and Trusts) is calculated as the taxable portion.
      • Commission and certain fees involved, can be added onto the base cost.
    •  
      •  

Example :

The initial calculation is the same for Trusts, Companies and Individuals.

Investment (or a portion thereof) was sold for : $50,000
Base Cost : $15,000
Foreign Capital Loss from the year before : R100,000
Let us use an exchange rate of R15 for $1

Proceeds $50,000 x R15 = R750,000
Base Cost$15,000 x R15 = R225,000
Foreign Capital Gain = R525,000

LESS :

Foreign Capital Loss      = R100,000
Leaves us with a nett Foreign Capital gain of : R425,000
Local Capital Gains       :  R 75,000

Total Taxable Gain to be considered       : R500,000

To calculate the portion that has to be taxed :

Individuals :
Total of ALL capital Gains = R500,000
Less Annual exclusion   = R   40,000
= R460,000

40% of the R460,000 is what your tax will be calculated on R460,000 x 40% = R184,000.
This R184,000 will be added to your salary, investment income, and any other income.

Companies and Trusts
Total of ALL capital Gains = R500,000
Less Annual exclusion   = R   ZERO
= R500,000

80% of the R500,000 is what your tax will be calculated on
R500,000 x 80% = R400,000

This R400,000 will be added to your company’s / Trust’s other income.

NOTE : Should a Trust opt to distribute the Capital Gain to the person who is a beneficiary, then that Capital Gain is taxed in the name of the individual and that person can deduct the annual exclusion of R40,000 and the balance of 40% is taxable in their names.

The Trust will then NOT pay tax on the Capital Gain.

– Salim Khan

Please click here to read related article on Foreign income and Expat Tax:

    • Salaries (Section 1) – see this article
      • Living in South Africa
      • Expat – living overseas for work, but still a South African citizen, and South Africa is still your “home” ?
    • Other earnings (Section 5) – see this article
      • Fees for services
      • Goods

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