Foreign tax credit
The South African Income Tax Act makes provision for a rebate against CIT in respect of foreign taxes paid on foreign-sourced income or a deduction against income of foreign taxes paid on SA-sourced income. In both instances, the taxpayer must be an SA resident, the income must be included in taxable income, and that income must have been subject to a foreign tax that is not recoverable. The rebate is limited to the total normal tax payable calculated by applying the ratio of the total taxable income attributable to the foreign tax to the total taxable income. The deduction, however, may not exceed the income on which the foreign tax was levied.
Research and development (R&D)
The current costs related to certain R&D activities carried on in South Africa are 150% deductible, subject to pre-approval by a government-appointed approval committee. The cost of machinery and other capital assets acquired for the purposes of R&D may be depreciated 50% in the first year of use, 30% in the second, and 20% in the third year. Buildings used in the process of R&D may be written-off over a 20-year period.
The incentive has been extended in its current form until 31 December 2023. Budget 2023 announced that the incentive will be amended (mainly to simplify it and also to make it easier to administer). The incentive (in its amended form) will be extended for a period of ten years from 1 January 2024.
Headquarter company regime
A ‘headquarter company’ regime encourages the use of South Africa as a location for intermediate holding companies.
The main benefits offered to a headquarter company are:
- Exemption from South Africa's CFC rules.
- Exemptions from dividend WHT on the headquarter company's dividend distributions.
- Exemption from the WHT on interest in certain circumstances.
- Exemption from South Africa's transfer pricing rules on back-to-back loans, outbound loans, back-to-back intellectual property (IP) licensing arrangements, and outbound IP licensing arrangements.
- The participation exemption for dividends received from, or gains derived on the disposal of, foreign qualifying holdings (these exemptions are not specific to headquarter companies but are available generally to SA-resident shareholders).
The requirements for a headquarter company are as follows:
- The headquarter company must be SA resident.
- Each shareholder in the headquarter company must hold at least 10% of the headquarter company's equity shares and voting rights. This means that a headquarter company can never have more than ten shareholders.
- At least 80% of the headquarter company's assets (measured on a ‘cost’ basis and excluding cash and certain bank deposits) must be comprised of certain assets related to the foreign companies in which the headquarter company holds at least 10% of the equity shares and voting rights. Specifically, these assets must be:
- the equity shares in those companies
- loans to those companies, and
- IP licensed to those companies.
- At least 50% of the headquarter company's gross income must be comprised of dividends, interest, royalties, rentals, service fees, or proceeds from the sale of equity shares or IP from its 10%-plus holdings, where the gross income exceeds ZAR 5 million.
Industrial policy projects
In 2008, a ZAR 20 billion incentive package for investors in energy efficient projects was announced. The incentive is available for industrial projects participating in the manufacturing sector (other than alcohol or alcohol-related products, tobacco or tobacco-related products, arms and ammunition, and biofuels, which have a negative impact on food security). Companies are divided into those with a qualifying status and those with a preferred status. The status is determined in terms of a point system.
The proposed project must either be a ‘brownfield project’ (expansion or upgrade of an existing industrial project) or a ‘greenfield project’ (a wholly new industrial project, which uses new and unused manufacturing assets). Approved projects may be granted a tax allowance known as an additional investment allowance equal to 55% (100% if located in an industrial development zone) of the cost of any manufacturing asset used in an industrial policy project with preferred status or 35% (75% if located in an industrial development zone) of the cost of any manufacturing asset used in any other approved industrial policy project.
The additional investment allowance may not exceed ZAR 900 million in the case of any greenfield project with a preferred status, ZAR 550 million in the case of any other greenfield project, ZAR 550 million in the case of any brownfield project with a preferred status, or ZAR 350 million in the case of any other brownfield project.
In addition to the above, a company may also claim a deduction known as an additional training allowance.
Note that although the incentive has now expired, industrial-policy projects approved before 31 March 2020 continue to be entitled to the Section 12I benefits.
Special Economic Zones (SEZs)
An SEZ incentive was introduced for companies carrying on business in certain approved SEZs comprising of a reduced corporate tax rate of 15% as well as a 10% allowance in respect of the cost of new and unused buildings owned by a qualifying company or any new or unused improvements to any building owned by a qualifying company.
In addition, employment incentives were introduced for employers carrying on a trade in an SEZ that will allow for an employees' tax reduction for the employer in respect of qualifying employees, up to a prescribed monthly amount.
VAT and customs relief are also available if the business is located within a Customs Controlled Area.
The incentive ceases to apply in respect of any year of assessment commencing on or after 1 January 2031.
Energy efficiency savings
The energy efficiency savings incentive provides an income tax deduction to qualifying taxpayers. The deduction equates to ZAR 0.95 for each kilowatt hour (or equivalent) saved by the taxpayer during the relevant year of assessment against a baseline from the beginning of the year.
The incentive has been extended to 31 December 2025.
International shipping incentive
Income from international shipping of a resident company that holds a share in a South African flagged ship is exempt from income tax. Qualifying shipping companies can also use a currency other than the rand as the functional currency.
Training contracts (learnership agreements)
There is an incentive that encourages employers to train employees in a regulated environment to facilitate skills development and job creation. This tax incentive is available for registered training contracts and allows for an additional income tax deduction (i.e. in addition to the usual deductions for remuneration expenses) for employers.