Currently the receipt of interest by a non-resident is exempt for so long as the interest is not effectively connected with a permanent establishment of a non-resident in South Africa. The purpose of this exemption is to attract foreign investment. However, it has been realised that the broad nature of this exemption has the effect that interest is exempt in the hands of investors that are located in tax havens or that also invest in non-public entities. It has been announced that the exemption will be limited to South African bonds, unit trusts, bank deposits or the like. In other words, investments or loans made to private entities will no longer enjoy exemption. 

It is expected that this amendment will have a substantial impact upon the flow of funds into South Africa even though it did not have a significant effect on permanent foreign investment. The announcement can be welcomed as the tendency was always for non-residents to make funds available in South Africa through means of loans as opposed to a more permanent manner of funding such as share capital. In other words, the tax regimes for debt differed from the case where one invested it through means of equity on the basis that an equity investment is much more expensive (also bearing in mind the dividend tax or secondary tax on companies that is payable).

The issue is not so much that an investor is in a tax haven and therefore does not pay tax, but it relates more to the nature of the funding that is made available in South Africa. Private loans will thus no longer result in exempt interest whereas the ultimate goal of the exemption is still preserved to the extent that one invests in South African bonds and the like.

Emil Brincker, Director, Tax