Dividends from South African resident companies fall under the dividends tax regime and are subject to a 20% withholding tax in terms of section 64E of the Income Tax Act 58 of 1962 (“Act”), known as dividends tax, rather than normal income tax. In contrast, foreign dividends are included in a taxpayer’s gross income unless relief is available under section 10B of the Income Tax Act 58 of 1962, which provides a full or partial participation exemption depending on certain circumstances. In this article, we unpack the important distinction in the tax treatment of local vs foreign dividends in South Africa.

A dividend is broadly defined in section 1 of the Act as any amount transferred or applied by a resident company for the benefit of or on behalf of any person in respect of any share in that company, whether in cash or otherwise, excluding amounts resulting in a reduction of contributed tax capital.

Ordinarily, dividends exhibit the characteristics of income in nature and would therefore, in principle, form part of a taxpayer’s gross income as defined in section 1. However, section 10(1)(k) of the Act provides a specific exemption for dividends received from a South African resident company, thereby excluding them from a taxpayer’s taxable income. Instead, such dividends are taxed through the Dividends Tax mechanism, which shifts the tax obligation to the company for withholding and paying the dividends withholding tax to the South African Revenue Service (SARS).

In contrast, foreign dividends, that is, dividends received from a foreign (non-resident) company, do not qualify for the exemption in section 10(1)(k), as the exemption applies only to dividends from resident companies. Consequently, foreign dividends are included in a taxpayer’s gross income, subject to possible relief under section 10B of the Act (the participation exemption) or a foreign tax credit in terms of section 6quat, where applicable.

The participation exemption contained in section 10B of the Act provides relief in respect of foreign dividends received by South African tax residents. Depending on the circumstances, this provision may entitle the taxpayer to either a 100% exemption or a partial (pro rata) exemption of the foreign dividend from normal tax. Broadly speaking, a full exemption applies where the resident holds at least 10% of the equity share capital and voting rights in the foreign company declaring the dividend, while a partial exemption, currently 25/45 of the dividend amount, applies where this threshold is not met.

The requirements to qualify for the participation exemption can be complex, particularly where intermediary holding structures, hybrid instruments, or anti-avoidance provisions such as section 9D (relating to controlled foreign companies) are involved. This article outlines only the basic aspects of section 10B of the Act.

Whether a dividend is received from a South African resident company or a foreign company determines how it will be taxed under South African law. Understanding this distinction is essential, as it affects whether the dividend falls within the dividends tax regime or is included in gross income. Taxpayers should carefully consider the source and structure of their dividend income and obtain appropriate advice to ensure compliance, optimise tax outcomes, and avoid unintended tax consequences.


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