Mr G is a Zimbabwean resident, registered for income tax there, earns a salary there. He is the sole shareholder of a RSA Pty. The RSA Pty is buying commercial property and borrowing money from Mr G. Mr G lives in Zim permanently. He is not registered for
Important:
This answer is based on tax law for the tax year ending 28 February 2020.
Answer:
From the information provided, the beneficial owner of the interest is a resident of Zimbabwe.
For purposes of the guidance that follows we accepted that the RSA (Pty) Ltd is resident in the RSA – essentially based on its place of management being in the RSA.
In terms of paragraph 1, of Article 11 of the treaty, both countries can tax the interest. But, under paragraph 2 of the Article, the “interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the beneficial owner of the interest is a resident of the other Contracting State, the tax so charged shall not exceed 5 per cent of the gross amount of the interest.”
The beneficial owner of the interest, the individual not resident in the RSA, will have to provide the RSA (Pty) Ltd with the required declaration (and undertaking) – see section 50E(3) of the Income Tax Act, in order for the lower rate to be applied. This tax is a final tax – see section 50E(3). In terms of paragraph 2(f), of General Notice 342 in Government Gazette 42545 dated 28 June 2019, the following persons must submit an income tax return, every “non-resident whose gross income included interest from a source in the Republic to which the provisions of section 10(1)(h) of the Income Tax Act do not apply”.
The section 10(1)(h) exemption applies in respect of “any amount of interest which is received by or accrues to any person that is not a resident, unless –
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that person is a natural person who was physically present in the Republic for a period exceeding 183 days in aggregate during the twelve-month period preceding the date on which the interest is received by or accrues to that person; or
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the debt from which the interest arises is effectively connected to a permanent establishment of that person in the Republic”.
The company can only make a deduction of the interest actually paid, if the requirements of section 24J(2) of the Income Tax Act, are met. In principle it can be deducted from the income of the person derived from carrying on any trade, if that amount is incurred in the production of the income (of the company).
Factually there is a transaction which has “been directly or indirectly entered into or effected between or for the benefit of … a person that is a resident; and any other person that is not a resident”. It will be an ‘affected transaction’, as defined in section 31, if “any term or condition of that transaction … is different from any term or condition that would have existed had those persons been independent persons dealing at arm's length”. If there is a tax benefit, the section 31(3) primary and secondary adjustments will then have to be made.