Tax payable in SA and UK?

My husband, who is a citizen of both the UK and SA, is a director and shareholder (37%) in a company in London. The product they are selling in Europe is manufactured in SA.

Sales are picking up and I would like to know what is the best way to treat dividends and profit shares that are generated in Europe, and whether we have a tax liability in SA after company tax is paid in the UK?

Doelie Lessing, director at the corporate and commercial law firm Werksmans, responds:

The first important aspect is to determine your husband's tax residence status, which could differ from his citizenship.  Generally speaking, he would be tax resident in the country where he ordinarily resides (where he keeps his pipe and slippers), regardless of his citizenship. 

Secondly, you need to determine the tax residence status of the company.  Essentially, a company is tax resident at its place of effective management, rather than where it is incorporated.  It appears from your question that the company has some operations in South Africa, which raises the question as to whether its place of effective management would be in the UK or in South Africa. Unfortunately, there is not sufficient information in your question to give an answer in this regard.

If the company is tax resident in the UK and your husband is tax resident in South Africa, the dividends received would, for South African tax purposes, be foreign dividends which are taxable in principle (at a maximum rate for individuals of 40%). 

South Africa offers a participation exemption, in terms of which no South African tax is payable on foreign dividends received by shareholders holding 20% or more of the shares in a company.  As your husband holds 37%, the participation exemption would apply, so he would not be subject to tax in South Africa on dividends received from the UK company. 

If the company is tax resident in the UK and your husband is not tax resident in South Africa, the dividends payable to your husband will not attract South African tax.

If the company is tax resident in South Africa, dividends declared by the company to your husband will attract secondary tax on companies (STC) at 10%, irrespective of his tax residence.  Your husband will not be subject to South African tax on the dividends received, yet the dividends will attract a tax on the company and will thus, effectively, reduce his profit share. 

South Africa is in the process of replacing the STC with a withholding tax on dividends. If the company is tax resident in South Africa, your husband (irrespective of his tax residence) will become subject to the tax, yet the company will need to withhold it.  The rate of the withholding tax is expected to be 10%. 

 - Fin24.com