Understanding Dividend Taxation in South Africa
Dividend taxation is a key compliance consideration for South African companies distributing profits to shareholders. Understanding how this tax applies is essential for directors, shareholders, and business owners aiming to manage their tax exposure effectively.
When a company declares dividends, they are drawn from post-tax profits, profits remaining after corporate income tax at 27% has been paid. These dividends are then subject to dividend withholding tax, a tax levied at a flat rate of 20%, regardless of the payout amount. The company is responsible for withholding this tax before making a payment to the shareholder.
How Are Dividends Taxed in South Africa?
Understanding how dividends are taxed in South Africa involves a straightforward three-step process:
The company earns profit and pays 27% corporate income tax.
The remaining post-tax profit may be declared as dividends.
A 20% dividends tax is withheld and paid to SARS.
Dividend Withholding Tax Calculation Example:
If a company earns R100,000 in profit:
R27,000 is paid as company tax.
R73,000 is available as distributable profit.
R14,600 (20%) is withheld as dividends tax.
The shareholder receives R58,400.
This calculation example also highlights why taxes on dividends are often seen as more tax-efficient for individuals in higher income tax brackets. The dividend tax rate in South Africa remains fixed at 20%, whereas personal income tax can reach up to 45%.
Tax-Efficient Planning with Dividends
For individuals in personal tax brackets exceeding 20%, taking dividends instead of additional salary may reduce the overall tax burden. South Africa’s income tax rates can range up to 45%, whereas the dividend tax rate in South Africa is fixed at 20%.
By declaring dividends:
You avoid additional personal income tax on salary.
Your earnings are taxed once at the company level and again at a lower rate through dividend withholding.
This creates an opportunity for tax optimisation, a key consideration when planning business remuneration strategies. If you're exploring how dividend taxation fits within your broader financial planning, our tax compliance services can help you structure your approach.
Legal Requirements for Declaring Dividends
Following the Companies Act, 2008 (Act No. 71 of 2008), a company may only declare dividends if it meets the following conditions:
Solvency and Liquidity Test: After the dividend is declared, the company must be able to pay its debts as they fall due and maintain assets exceeding liabilities.
Board Resolution: The board must formally approve the dividend and confirm the company’s solvency and liquidity.
Shareholders’ Rights: Once declared, shareholders are legally entitled to receive dividends, although companies are not required to declare them annually.
Dividends declared from one company to another (e.g., to a holding company) are exempt from dividend tax.
Other Key Considerations
When managing dividend taxation, keep these compliance points in mind:
Dividend tax returns must be submitted to SARS by the end of the month following the month in which dividends were paid.
South Africa’s dividend tax regime forms part of the broader types of taxation in South Africa, alongside income tax, VAT, and capital gains tax.
Understanding the difference between tax and VAT is important: VAT is a tax on the supply of goods and services, whereas the dividends tax applies to profit distributions.
Certain entities, such as approved retirement funds and tax-exempt organizations, may qualify for exemptions from dividend withholding tax. If you're unsure whether an exemption applies, consult a tax professional.
Managing Dividend Taxation Effectively
Dividend taxation in South Africa affects both the financial performance of companies and the personal income of shareholders. Strategic planning, a solid understanding of compliance requirements, and awareness of the applicable tax rates all contribute to more efficient financial management. From calculating taxes on dividends to ensuring board resolutions and SARS submissions are handled correctly, proactive attention to detail is essential.
If you need expert guidance on dividend structuring, legal compliance, or understanding how dividend tax is calculated for your business, book a consultation with Anlo Financial Solutions today.
