1) Should the non-residents contribution be treated as a loan to the RSA company on which a return in the form of interest will be paid, even though the return is as yet undecided. (The return will be determined once the property is sold, and all costs de
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
An understanding of the exact nature of the agreement is crucial as the tax consequences follow from that. From the limited information provided the parties may well have entered into a partnership and we don’t understand on what basis you say that it is “not a joint venture, but a lending arrangement”.
In terms of the 20105 draft Taxation Laws Amendment Bill section 50A of the Income Tax Act, is to be amended (effective 1 March 2015) by the insertion in subsection of the following definition:
‘interest’ means interest as defined in section 24J(1);.
According to section 24J a ‘lending arrangement’ means any arrangement or agreement in terms of which—
(a) a person (the lender) lends any instrument to another person (the borrower); and
(b) the borrower in return undertakes to return any instrument of the same kind and of the same or equivalent quantity and quality to the lender;
We submit that the ordinary meaning may well be similar.
As indicated above, we are not sure why you consider this to be a lending arrangement. If you are correct, the next issue is whether or not the debt claim in respect of which that interest is paid is effectively connected with a permanent establishment of that foreign person in the RSA if that foreign person is registered as a taxpayer in terms of Chapter 3 of the Tax Administration Act. This would again arise if the agreement is NOT a lending agreement. To determine whether or not a permanent establishment arises one will have to also consult the treaty between the RSA and the country of residence of the foreign person. If it is a pure lending arrangement it is unlikely that the foreign person would have a permanent establishment in the RSA and the interest would then be subject to the withholding tax.