South Africa has a. Capitalising on the African network. Update: South Africa. By Prof. Phillip Haupt, Cape Town, South Africa

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1 Capitalising on the African network By Prof. Phillip Haupt, Cape Town, South Africa South Africa has a comprehensive tax treaty network. Although it is not a member of the Organisation for Economic Co-operation and Development (OECD), many of its trading partners are, and South Africa regards the OECD guidelines as important and influential. Most of South Africa s double tax agreements (DTAs) are therefore based on the OECD model (See page 33). Section 108 of the South African Income Tax Act (the Act) incorporates the provisions of the treaties in the Act by virtue of the provisions of subsection (2), i.e.: As soon as may be after the approval by Parliament of any such agreement, as contemplated in section 231 of the Constitution, the arrangements thereby made shall be notified by publication in the Gazette and the arrangements so notified shall thereupon have effect as if enacted in the Act. (emphasis added) In this article I cover the effect of certain DTAs on tax planning and tax planning structures used by South African taxpayers in and outside South Africa. By way of example, I will refer to certain of the provisions of the treaties which South Africa has with Mauritius and Namibia, part of the SADEC group of countries 1. Individuals With effect from years of assessment commencing on or after 1 January 2001 (1 March 2001 for individuals and 1 July 2001 for certain farmers), South Africa changed from a source to a residence basis of tax for persons ordinarily resident in South Africa. The source basis was retained in a slightly revised form for non-south African residents. Prior to this change, a large part of international tax planning for South Africans involved moving the source of income to outside South Africa and minimising the tax liability in the other country. For individuals this was fairly easy to do by using, for example, articles 14 and 15 of the OECD model treaty. Article 14 applies to independent person services and reads as follows (I have used the article from the DTA between South Africa and Namibia): 1. Income derived by an individual who is a resident of a Contracting State in respect of professional services or other activities of an independent character shall be taxable only in that State unless he or she has a fixed base regularly available to him or her in the other Contracting State for the purpose of performing his or her activities. If he or she has such a fixed base, the income may be taxed in the other State but only so much of it as is attributable to that fixed base. For the purposes of this Agreement, where an individual who is a resident of a Contracting State stays in the other Contracting State for a period or periods exceeding in the aggregate 183 days in any twelvemonth period commencing or ending in the year of assessment concerned, he or she shall be 32

2 deemed to have a fixed base regularly available to him or her in that other State and the income that is derived from his or her activities that are performed in that other State shall be attributable to that fixed base. 2. The term professional services includes especially independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, lawyers, engineers, architects, dentists and accountants. Many of the current DTAs make no reference to the 183-day rule. The older DTAs, such as those with Malawi, Tanzania, Zambia, and Zimbabwe, refer to a 183-day rule, but do not refer to a fixed base regularly available to the individual. The older DTAs are in the process of being replaced, however. Usually, by ensuring that the professional did not have a fixed base in the other country, or that he was in the other country for less than 183 days in any year of assessment, calendar year, or 12-month period (depending on the particular provisions of the DTA) he was not taxed there. As he was earning income from a non-south African source, he was not taxed in South Africa either. Article 15 of the OECD model treaty deals with dependent personal services (salaries and wages). It could also be used to avoid tax in both countries. The important paragraphs of Article 15 are as follows: 1. Subject to the provisions of Articles 16, 18 and 19, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other State. 2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned State if: a) the recipient is present in the other State for a period or periods not exceeding the aggregate 183 days in any 12-month period commencing or ending in the fiscal year concerned, and b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other State, and c) the remuneration is not borne by a permanent establishment which the employer has in the other State. Tax savings were achieved by ensuring that the South African resident was in the other country for less than 183 days in the 12-month period referred to in the agreement, that he was not paid by a resident of the other country, and that his salary was not borne by a permanent establishment which his South African employer had in the other country. The result was that the DTA prevented the other country from taxing him, and South Africa did not tax him because he was working outside the country earning income from a non-south African source. The introduction of the residence basis of taxation has ended this form of tax planning. Now South Africa taxes the resident s professional or employment income regardless of where in the world he works, and regardless of the provisions of the double tax agreements. This is because the double tax agreements do not prevent South Africa from taxing the individual s professional or employment income if the other country is allowed to tax that income. The effect of the double tax agreement is that if the other country is entitled to tax the income, it has priority, and South Africa has to give the individual a credit against his South African tax for the tax paid in the other country. Tax planning for individuals now involves moving their ordinary residence outside South Africa (but this is possible in very limited circumstances) or using the unilateral relief from tax on employment income if certain conditions are met. This relief applies regardless of whether the other country taxes the individual s income. Section 10(1)(o) of the Act exempts a person s income from employment from South Africa has comprehensive double tax agreements (DTAs) with the following countries: Algeria, Australia, Austria, Belgium, Botswana (currently being replaced with a new treaty), Canada, Croatia, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany (currently being replaced), Hungary, India, Indonesia, Iran, Ireland, Italy, Israel, Japan, Korea, Lesotho, Luxembourg, Malawi, (currently being replaced), Malta, Mauritius, Namibia, Netherlands (currently being replaced), Norway, Pakistan, People s Republic of China, Poland, Romania, Russian Federation, Singapore, Slovak Republic, Swaziland (currently being replaced with a new treaty), Sweden, Switzerland, Taiwan, Tanzania (currently being replaced), Thailand, Tunisia, Uganda, United Kingdom (currently being replaced), United States of America, Zambia (currently being replaced), Zimbabwe (currently being replaced). South Africa is still awaiting ratification of the treaties with Nigeria and Greece, and must still ratify the treaties with New Zealand and Seychelles. New treaties negotiated but not yet signed, are those with Belarus, Botswana, Bulgaria, Estonia, Gabon, Germany, Kuwait, Latvia, Lithuania, Malawi, Malaysia, Morocco, Netherlands, New Zealand, Oman, Portugal, Rwanda, Spain, Swaziland, Tanzania, Turkey, Ukraine, United Arab Emirates, United Kingdom, Zambia, Zimbabwe. Treaties under negotiation are those with Bangladesh, Mozambique, Qatar, and Sri Lanka. July 2002 SEPTEMBER

3 tax in South Africa if: (i) the services are rendered outside South Africa; (ii) for or on behalf of any employer; (iii) if the person is outside South Africa for periods exceeding 183 full days in aggregate during any 12-month period commencing or ending during the year of assessment; and (iv) if the person is outside South Africa for a continuous period exceeding 60 full days during such 12-month period; and (v) the services were rendered during such periods. The reference to full days means that the day when the taxpayer leaves South Africa, and the day when he returns, are not counted in determining whether he has met the requirements. Therefore, if the person can be outside South Africa for more than 183 full days during any 12-month period starting or ending in the tax year, and be in the other country for 183 days or less during any 12-month period starting or ending in the relevant year, and his salary is not paid by a resident of the other country nor borne by a permanent establishment (of his employer) in that other country, then he can earn such salary free of tax both in South Africa and in the other country. This may need some planning. For example, if he is self-employed, he would have to set up an employment company, preferably in a taxpayerfriendly jurisdiction which taxes on a source basis or which has no tax. He would have to spend some time on holiday in a third country, because if he spent all of his time in South Africa and the other country, he would, most likely, be spending more than 183 days in one of them, as a 12-month period only has 365 days. South Africa has fairly strict exchange controls, so provided that the employment company is outside of the South African common monetary area, it would not have to repatriate its income to South Africa, and the South African individual, if he had earned his salary outside South Africa, would also not have to repatriate it to South Africa. A foreign employment company cannot be used to totally avoid South African income tax on the income which a South African individual generates outside South Africa. If the individual renders services to the company and he is connected to the company, the South African fiscus would apply the transfer pricing rules contained in section 31 of the Act to deem the individual to have earned a fair salary from the company. He would then pay tax on this notional salary, unless the section 10 (1)(0) exemption applies Companies South African companies or enterprises can carry on business outside South Africa by means of foreign branches or foreign subsidiaries. Alternatively, they may do so by means of foreign companies held by trusts controlled by the same individuals who control the South African companies, or by means of foreign companies owned and controlled by South African individuals. I intend to look at a few simple structures using Namibia on the one hand and Mauritius on the other. Namibia Namibia is an independent country on South Africa s north-west border. As it is part of the Common Monetary Area 2, South African exchange controls do not apply. South Africans (individuals, companies, trusts, etc.) are allowed to transfer funds to and from that country and invest in the country without having to obtain Reserve Bank permission. The Namibian Dollar is linked to the South African Rand. One Namibian Dollar equals one Rand. Approximately 10 Namibian Dollars equals one US Dollar. Namibia is also on South Africa s list of designated countries 3. Being a designated country means that South Africans investing or carrying on business in that country enjoy certain tax exemptions in South Africa in respect of income earned in that country, provided certain conditions are met. Namibia has no estate or death duties, no donations tax or gift tax, no tax on capital gains, and still taxes residents and others on a source basis. The Namibian Revenue Service is also perceived as being less hostile to taxpayers than the South African Revenue Service. The rate of tax for companies (other than mining companies) is 35% in Namibia, which compares favourably with South Africa s company tax rate of 30% plus the secondary tax of 12.5% on the distribution of after-tax profits. The secondary tax is payable when the South African company pays a dividend to shareholders (local and foreign). If all the after-tax profits of the South African company are paid to shareholders, the effective total tax rate in South Africa is 37.78%. The problem with secondary tax on companies is that it is not a tax on the company s profits, nor is it a withholding tax on the dividends. It is different in concept to the normal taxes on income and dividends. The various double tax agreements do not satisfactorily deal with this tax, but the DTA with Namibia specifically refers to this tax. The maximum tax rate for individuals in Namibia is 36%, which is reached at a taxable income of N$200,000, whereas the maximum tax rate for individuals in South Africa is 40%. Namibia does not withhold tax on interest or royalties paid to non- Namibian residents, but it does withhold a tax of 10% of all dividends paid by Namibian companies to non- Namibian residents. Namibia s exchange control regime is less stringent than South Africa s. For example, Authorised Dealers in Namibia may release all emigrant blocked funds held back at 28 February Namibia is also a fairly stable country. The result is that more and more South Africans are locating their trusts and holding companies in Namibia, primarily with a view to avoiding estate duty and the tax on capital gains. Due to South Africa s anti-tax avoidance and 34

4 transfer-pricing rules, however, there is a right way and a wrong way to do this. The standard structure is for a trust to be set up in Namibia, which would hold all of the equity shares in a holding company in Namibia. This company would then invest in a company or group of companies in South Africa, by means of the South African owners selling their interest in the group to the Namibian company, usually on an interest-free loan account. It is this interest-free loan account which poses a danger for the South African residents. The structure can be illustrated as follows: South Africa Namibia Interest-free loan account South African Individual or trust The South African individual or the beneficiaries of the South African trust are usually the beneficiaries of the Namibian trust. This means that the loan between the South African individual or trust and the Namibian company is a transaction between connected persons. It is also the supply of a financial service in terms of an international agreement as envisaged in section 31 of the Act. The South African Revenue Service has been applying section 31 (which is a discretionary section) to deem such loans to bear interest at the official rate in terms of the Act (which is currently 11.5% increasing to 13.5% on 1 September 2002) and taxing the South African lenders on this notional interest. As it is only notional interest, it is not subject to the provisions of the double tax agreement between South Africa and Namibia. Had the South African lender actually charged interest, this would have been subject to the provisions of the double tax agreement. South Africa would be entitled to tax the interest, and depending on the circumstances and the use to which the funds were put, the Namibian company may be entitled to a tax deduction in Namibia. The problem can be avoided in a number of ways, i.e.: 1) The loan can be ceded to another Namibian company in return for Trust Company Group of Companies shares in that company. 2) If the loan arose on the sale of the interests in the group companies, these shares/interests should have been sold to a South African company set up by the Namibian company, so that the loan would then have been to another South African resident. 3) If the South African lender is a trust, and it has a Namibian beneficiary, then provided that the trust has sufficient reserves, it can settle the loan on the Namibian beneficiary. Such a distribution will be free of donations tax in terms of section 56(1)(l) of the Act. Where South African donations tax is payable, it is leviable at a flat rate of 20% on the value of a donation. 4) In all of these transactions, the effects of the South African tax on capital gains has to be borne in mind. In addition to the section 31 transfer pricing rules, section 7(8) of the Act provides that if a donation, settlement or similar disposition is made by a South African resident to anyone, as a result of which a non-resident receives income (whether or not that non-resident is connected to the South African resident), the income the non-resident earns as a result of the investment of the funds or assets acquired by such means will be taxed in the hands of the South African resident. Therefore, if a South African lends funds interest-free, for example, to a Namibian company or trust, this loan is treated as a disposition similar to a donation or settlement. The income earned as a result of the investment of the loan funds is taxed in the hands of the South African lender. Theoretically, the Revenue Service could apply both section 31 and section 7(8) to the same loan. Another point to bear in mind is that, regardless of the terms of the double tax agreement, if a non-resident trust or nonresident company is effectively managed in South Africa, it will be deemed to be a South African resident, and subject to tax in South Africa on its worldwide income (see the tie-breaker rules set out in article 4 of the Namibian agreement infra). Credit would have to be given, however, for the taxes paid by the company or trust in its own jurisdiction and anywhere else in the world. As Namibia is a designated country and its tax rate for companies is greater than 27%, section 9F of the South African Income Tax Act would apply to prevent South Africa from taxing its income provided that such income is taxed in Namibia, i.e.: 9F (1) For the purposes of this section designated country means a designated country as defined in section 9E. (2) The amount of any income which shall be exempt from tax in terms of the provisions of section 10(1)(kA), shall be so much of any amount SEPTEMBER

5 received by or accrued during the relevant year of assessment to any company which is a resident from a source outside the Republic, which is not deemed to be from a source in the Republic, which has been or will be subject to tax in any designated country at a statutory rate of at least 27 per cent (after taking into account the application of the relevant agreement for the avoidance of double taxation, if any, without any right of recovery by any person other than a right of recovery in terms of an entitlement to carry back losses arising during any year of assessment to any year of assessment prior to such year of assessment): Provided that where such designated country imposes tax on a company at a progressive scale of statutory rates, the statutory rate shall for the purposes of this subsection be deemed to be the highest rate on such scale. (emphasis added) This section does not apply to trusts, so that if the Namibian trust is effectively managed in South Africa, its income would be taxable in South Africa. A credit would have to be given for the tax paid in Namibia, however. Where a South African company carries on business outside South Africa, the article dealing with business profits applies. In the Namibian DTA this is set out in article 7. The essence of article 7 is set out in paragraphs 1 and 2 as follows (emphasis added): Article 7 Business Profits 1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment. 2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment. (Paragraphs 3 to 7 of the article deal with the method of apportioning profits.) Although the Namibian business profits of a South African enterprise trading through a permanent establishment in Namibia may be taxed in Namibia, there is nothing in the DTA that prevents South Africa from also taxing the profits. The term enterprise of a Contracting State is defined in the DTA as: (f)the terms enterprise of a Contracting State and enterprise of the other Contracting State mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State. It does not matter where the enterprise is carried on. The double tax agreement defines a resident in article 4 as follows (italics added): 1. For the purposes of this Agreement, the term resident of a Contracting State means any individual who is ordinarily resident in that State and any legal person which has its place of management in that State. 2. Where by reason of the provisions of paragraph 1 an individual is a resident of both Contracting States, then his or her status shall be determined as follows: (a) he or she shall be deemed to be a resident of the State in which he or she has a permanent home available to him or her. If he or she has a permanent home available to him or her in both States, he or she shall be deemed to be a resident of the State with which his or her personal and economic relations are closer (centre of vital interests); (b) if the State in which he or she has his or her centre of vital interests cannot be determined, or if he or she does not have a permanent home available to him or her in either State, he or she shall be deemed to be a resident of the State in which he or she has an habitual abode; (c) if he or she has an habitual abode in both States or in neither of them, he or she shall be deemed to be a resident of the State of which he or she is a national; (d) if he or she is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement. 3. Where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated. These are known as the tie-breaker rules refered to earlier. This definition is different from the definition set out in the South African Income Tax Act. For example, a company is treated as resident in South Africa if it is incorporated or effectively managed in South Africa. Therefore, if a company is incorporated in South Africa, but has its place of management in Namibia, it is a resident of Namibia for the purposes of the DTA. As a result, if the company only carries on business in Namibia, it is an enterprise of Namibia, and as it does not have a permanent establishment in South Africa, South Africa cannot tax it, notwithstanding that in terms of the normal provisions of the South African Income Tax Act, the company is a resident of South Africa. If the company is managed in South Africa, the DTA would not prevent South Africa from taxing its income. Namibia would simply have the first right to tax. However, in the 36

6 circumstances, section 9F, read with section 10(1)(kA) of the Act (see above), would prevent South Africa from taxing the income. Mauritius Mauritius is an island in the Indian Ocean. It is a popular jurisdiction for South African residents to establish a business in, because it provides a springboard into Central Africa and the Far East. It has an extensive treaty network and a favourable tax regime for offshore businesses. It is also not on the OECD s FATF 4 list of non-cooperative jurisdictions. One of the most useful provisions in the DTA between South Africa and Mauritius is that contained in Article 23(2) and (3). Article 23 deals with the elimination of double taxation and provides as follows in paragraphs (2) and (3): 2.For the purposes of subparagraph 1(b) of this Article, the tax payable in Mauritius shall be deemed to include the amount of tax which would have been paid if the tax had not been reduced in accordance with laws designed to promote economic development in Mauritius, effective on the date of entry into force of this Agreement, or provisions which may be introduced in future in modification of, or in addition to, the existing laws. 3. A grant given by one of the Contracting States or a political subdivision thereof to a resident of the other Contracting State under the laws of, and for the purpose of promoting economic development in, the first-mentioned State, shall not be taxable in the other State. If a South African resident sets up an offshore company in Mauritius (as opposed to a tax-exempt international company), this company will be subject to tax at 15% and will be able to make use of the tax treaties which Mauritius has with the rest of the world, including South Africa. Mauritius allows the offshore company a foreign tax credit of 90% of the Mauritius tax chargeable, whether or not the offshore company actually pays any foreign tax. This reduces the effective tax paid by the offshore company to 1.5% of its income. If South Africa taxes the income of the Mauritian company in the hands of the South African shareholder, however, it has to give the shareholder a tax rebate of the full 15% tax payable to the Mauritian fiscus before taking into account the tax credit. This is the effect of Article 23(2). Example Mr X, a South African resident, sets up an international licensing and franchising company in Mauritius and registers it as an offshore company. He obtains South African exchange control approval to invest in the company and injects sufficient share capital into it to enable it to purchase the necessary intellectual property from another non- South African entity. It licenses this property to businesses in other parts of the world and earns franchising and licence fees. As South Africans own more than 50% of the share capital or voting rights of the Mauritian company, it is a controlled foreign entity as defined in section 9D of the Act. This means that its taxable income must be calculated in terms of the South African Income Tax Act and converted to South African Rands at the spot rate applying at the end of its year of assessment (i.e. its financial year-end). This taxable income must then be apportioned to the South African shareholders in the ratio of their shareholdings. The result is that Mr X is taxed in South Africa on the full profit of the Mauritian company. As Mauritius is not on the list of designated countries, no exemptions apply. Mr X must be given credit in South Africa for the Mauritian tax liability of the company. This is in terms of section 6quat of the Act. As the income of the company has been taxed in South Africa, any dividend which the company pays to Mr X will be tax-free in his hands. The result is as follows for every R100 of taxable income of the company: Taxable income of company Tax in Mauritius Foreign tax credit Available for dividend Mr X s9d inclusion in SA income South African tax paid on deemed income Section 6quat rebate for Mauritian tax Dividend from company South African tax already paid Effective after-tax income Note: It has been assumed that Mr X is on the maximum marginal tax rate of 40% in South Africa. It has also been assumed that article 23 applies even though South Africa taxes the income in Mr X s hands instead of in the company s hands. There is an argument that the article should not apply in these circumstances, but to not apply the article merely because the company s income is deemed to be Mr X s income is to defeat the substance and intent of the provision. Mr X has effectively paid a total tax of 27.5% of the taxable income instead of tax at the maximum South African rate of 40%. If the shares of the company are held by an offshore trust, it will not be a controlled foreign entity for South African tax purposes, provided that the majority of the voting rights are not held by South African residents. Interposing the trust would prevent its profit being included in Mr X s South African income in terms of section 9D of the Act. However, the problem is how does Mr X then fund the company? If he lends it the funds to buy the intellectual property, he has to charge it a commercial rate of interest to avoid section 31 or section 7(8) of the Act applying (see above). This interest income will be taxed in his hands in South Africa at his marginal rate of tax. There may then be no overall tax saving, depending on the profitability of the company. As the company would not be linked to South Africa by shareholding or business activities, the provisions of the double tax agreement would not be relevant. If he invests in non-participating SEPTEMBER

7 preference shares issued by the company, these shares would have to be denominated in South African Rands if he did not want to make a foreign exchange gain or loss on their disposal. The shares would have to bear a fair dividend coupon rate in order for the general anti-tax avoidance provisions not to apply. The dividends paid on the preference shares would be taxed in South Africa as normal income 5. Also, if a trust is used, the section 6quat rebate falls away. So if the company paid a dividend to the trust, and the trust distributed the dividend to a South African beneficiary, the beneficiary would be taxed on the dividend. They would also not be entitled to a tax rebate for the Mauritian tax on the profits out of which the dividend was paid. Trusts are therefore normally used in structures where the income is earned in a jurisdiction with which South Africa has no double tax agreement. The location is usually a low-tax or a no-tax jurisdiction, where funding can be obtained from a non- South African resident. Where the funding has to come from South Africa, the following structure has been used to break all ties between South Africa and the foreign country. The aim is to reduce income tax and avoid the tax on capital gains and pegging any estate duty liability. As with any structure, there is always the risk that the Revenue Service will attempt to apply the general anti-tax avoidance provisions to prevent the tax saving. This will be done primarily on the grounds that the structure or elements of the structure are abnormal. South Africa South African Resident Shares Dividends similar disposition, so section 7(8) of the Act is not applicable. The result of this structure is that the South African resident is only taxed on the net interest income and foreign exchange profits and losses of the finance company. This is because it is a controlled foreign entity by virtue of the resident s shareholding. If the finance company is located in a designated country, and the interest income is taxed in that designated country at a rate of at least 27%, the South African resident will not be subject to tax on the finance company s income, and the dividend from the finance company will be free of tax in South Africa. If it was possible, for example, to have the finance company incorporated and taxed in the UK, the maximum rate of tax would be 30%, there would be no withholding tax on the dividend, and the result would be that the South African s tax would be nil. However, had the finance company been in an offshore financial jurisdiction, the South African resident would be taxed on its income at his marginal rate, which could vary from 0% to 40% depending on the level of his income. The trust and the investment or trading company could be located in the offshore jurisdiction. Any capital growth in the value of the assets or investments of this company would not accrue to the South African resident. Any dividends received by the trust, plus any capital profits, would also not be taxed in the South African resident s hands if he did not fund the trust and did not take any distributions from the trust. Overseas Finance Company Loan Interest Dividends Trust Shares Operating or investment company Authors note: The provisions discussed in this article are specific to the examples and circumstances given and should not be used as a general guide to tax planning without taking professional advice. Archive links: International investment - South African income tax developments - February 2000, Issue 103 Regional economic co-operation and integration in South Africa - February 2000, Issue 103 South African taxman tightens his grip - October 2001, Issue 120 FOOTNOTES 1 SADEC or SADC (Southern African Development Community) countries are; Angola, Botswana, Democratic Republic of the Congo, Lesotho, Malawi, Mauritius, Mozambique, Namibia, Seychelles, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. 2 The countries in the common monetary area or CMA are; the Republic of South Africa, Lesotho, Namibia and Swaziland. 3 The designated countries are: Algeria, Australia, Austria, Belgium, Canada, Croatia, Czech Republic, Denmark, Egypt, Finland, France, Germany, Israel, Italy, Japan, Republic of Korea, Lesotho, Malawi, Namibia, Netherlands, Norway, Poland, Romania, Slovakia, Swaziland, Sweden, Thailand, Tunisia, United Kingdom, United States of America, Zambia, and Zimbabwe. 4 Financial Action Task Force. The holding of shares in the finance company is not an international transaction for the purposes of section 31 of the Act, so that section is not applicable. It is also not a donation, settlement, or If the loan between the finance company and the operating company was not denominated in South African Rands, a sale of the shares by the South African resident might result in a profit or loss in Rand terms. 5 South Africa subjects foreign dividends received by its residents to normal tax, but South African source dividends are exempt from tax. 38