Navigating Withholding Tax on Cross-Border Services: South Africa–Lesotho Consideration

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Navigating Withholding Tax on Cross-Border Services: South Africa–Lesotho Consideration

• 16 July 2025
• International Tax
• The Tax Faculty Tax Specialist

This article is based on tax law for the year ending 29 February 2026.

Question:

A South African service provider rendered services valued at R100,000 to a company resident in Lesotho. The Lesotho entity intends to deduct withholding tax of R15,000 and remit only the net amount of R85,000. The South African supplier seeks to receive the full contract value and handle the related tax obligations in accordance with South African tax legislation through the South African Revenue Service (SARS).

Answer:

The Problem / Facts

A South African service provider rendered services valued at R100,000 to a company resident in Lesotho. The Lesotho entity intends to deduct withholding tax of R15,000 and remit only the net amount of R85,000. The South African supplier seeks to receive the full contract value and handle the related tax obligations in accordance with South African tax legislation through the South African Revenue Service (SARS).

Analysis of Tax Issues

The transaction raises several interconnected tax considerations:

• Cross-border service income: The South African company has earned income from services rendered to a non-resident, which gives rise to potential tax obligations in both South Africa and Lesotho.
• Withholding tax imposition: Lesotho domestic tax legislation likely imposes a withholding tax on payments made to non-residents for services rendered, creating an immediate tax cost for the South African entity.
• Double taxation relief: The Double Taxation Agreement (DTA) between South Africa and Lesotho is designed to mitigate the effects of double taxation. However, the practical application of the relief mechanisms provided in the treaty requires careful assessment.
• Limitations of section 6quat: Although South African legislation (section 6quat) permits foreign tax credits for taxes paid abroad, its apportionment rules may restrict the available relief, particularly where the foreign tax rate diverges from the applicable South African rate.

Tax Issues and Relevant Legislation

Income Tax Act 58 of 1962:

• Section 6quat – Allows for relief in respect of foreign taxes paid on income also subject to tax in South Africa.
• Section 9 – Establishes the source rules for income derived from services.
• Section 1 – Defines “gross income”, which includes income derived from services rendered.

South Africa–Lesotho Double Taxation Agreement:

• Article 12 (Technical Services) – Provides for potential reductions in withholding tax rates for services.
• Article 24 (Elimination of Double Taxation) – Outlines mechanisms to relieve double taxation.
• The DTA may also offer mutual agreement procedures or competent authority assistance to resolve cross-border disputes

Application of Law to Facts

Immediate Relief Options:

1. Certificate of Tax Residency
   The South African supplier should obtain a tax residency certificate from SARS. This certificate can be submitted to the Lesotho authorities to claim treaty benefits, including any applicable reduced withholding tax rates under the DTA.

2. Advance Ruling from SARS
   In terms of sections 92 to 95 of the Tax Administration Act, the company may apply for an advance tax ruling to confirm the tax treatment of the transaction and the extent of relief available under South African tax law.

3. Engagement with Lesotho Tax Authorities
   The supplier should engage directly with the Lesotho tax authorities to understand and comply with their procedures for claiming a withholding tax exemption or reduction under the DTA.

Section 6quat Relief Considerations:

While section 6quat permits a foreign tax credit, it is limited to the lower of the foreign tax paid or the South African tax payable on the same income. In this case, assuming a 15% withholding tax in Lesotho and a 27% corporate tax rate in South Africa, the credit would be limited to 15% of the taxable portion of the relevant income. Documentation must be retained to substantiate the foreign tax paid and its link to the South African taxable income.

Recommended Approach

• Obtain a SARS tax residency certificate to support the treaty relief claim.
• Analyse Article 12 of the DTA to determine the correct withholding rate on technical services.
• Engage proactively with the Lesotho tax authority to confirm the procedural requirements for exemption or reduced rates.
• Explore possible transaction structuring to optimise treaty benefits, if feasible.
• If withholding tax cannot be avoided, ensure complete and accurate documentation to support any future section 6quat claim with SARS.

Conclusion

The optimal resolution requires early engagement with both SARS and the Lesotho tax authorities, supported by formal documentation to assert treaty entitlements. Relying solely on section 6quat relief after the fact may not provide full economic protection, especially if the foreign tax credit is limited. A pre-emptive, well-documented approach is recommended to ensure the South African supplier receives the gross payment and complies with both jurisdictions’ tax obligations.

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