Secondary Tax on Companies was levied on the company when it declared a dividend, on top of its own income tax. Because the company paid, no treaty and no shareholder exemption could reach it. A pension fund and a billionaire bore exactly the same STC.
Dividends tax replaces STC at 15%. The liability now sits with the beneficial owner (s 64EA), so the tax can finally look at who receives: resident companies, retirement funds and PBOs are exempt, and treaty rates apply to foreign investors.
The rate rose to 20% for dividends paid from 22 Feb 2017. The company rate fell from 28% to 27% (years ending on or after 31 Mar 2023), so the combined burden dropped from 42.4% to 41.6%. Budget 2026 left both rates unchanged.
A rand of company profit meets SARS twice. Layer 1 is company income tax at 27% when the profit is earned. Layer 2 is dividends tax at 20% when that after-tax profit leaves the company. Layer 2 is a final tax on the shareholder, withheld at source, and it depends on who the shareholder is. Change the payer, the shareholder and the paperwork, and watch the second layer switch on, shrink or disappear.
An owner of a private company can take profit out as salary (deductible for the company under s 11(a), taxed at personal marginal rates) or as dividends (no deduction, 27% company tax, then 20% dividends tax). A rand of dividend costs 27% + 20% × 73% = 41.6%. Salary is cheaper while the owner's marginal rate stays below that, and dearer once it climbs to 45%. Move the salary lever and find the bottom of the curve.
| Strategy | Salary | Dividend | Total tax | Owner keeps |
|---|
Owners often draw cash from their company as a "loan" to avoid declaring a dividend. Section 64E(4) closes that route: when a company lends to a resident natural person or trust that is a connected person, at less than the official rate, the interest it forgoes is a deemed dividend in specie. The company, not the borrower, pays 20% dividends tax on it, every year the loan stands.
| Question | STC (to 31 Mar 2012) | Dividends tax (from 1 Apr 2012) |
|---|---|---|
| Who bears it | The company declaring the dividend, as a tax on the company itself. | The beneficial owner of the dividend (s 64EA(a)). The company or broker only withholds it. |
| Who can be exempt | Nobody at shareholder level. Every shareholder bore the same STC through the company. | Resident companies, retirement funds, PBOs, government and others under s 64F, if the shareholder lodges a declaration. |
| Foreign investors | Treaties generally could not reduce STC because it was a company tax. | Treaty rates (often 5%, 10% or 15%) apply because the tax is now on the shareholder. |
| Effect on accounts | Showed in the company's tax expense and reduced reported earnings. | Does not appear in the company's income statement. It is withheld from the shareholder's dividend. |
| Dividends in specie | Company liable. | Still the company (s 64EA(b)), because an asset cannot be "withheld from". |
| Trap | The error | The correct treatment |
|---|---|---|
| "Dividends are tax-free" | Leaving dividends out of the answer entirely. | Local dividends are exempt from normal tax (s 10(1)(k)(i)), but 20% dividends tax is withheld as a final tax. Show the exemption in the income tax computation and the withholding separately. |
| The combined rate | Adding 27% + 20% = 47%. | Dividends tax applies to what is left after company tax: 27% + 20% × 73% = 41.6% of pre-tax profit. |
| Who is liable | "The company pays dividends tax." | For cash dividends the shareholder is liable and the company or regulated intermediary withholds (ss 64G, 64H). Only for dividends in specie is the company itself liable (s 64EA(b)). |
| Exempt, but no paperwork | Treating a resident company shareholder as automatically exempt. | Without a declaration and written undertaking, the withholding agent must withhold 20% (s 64G(2)(a), s 64H(2)(a)). The shareholder can claim a refund under s 64L once the declaration is lodged. Declarations lapse after five years. |
| REIT dividends | Withholding 20% dividends tax from a resident REIT investor. | REIT dividends to residents are taxable as income at marginal rates (proviso to s 10(1)(k)(i)) and exempt from dividends tax (s 64F(1)(l)). The REIT deducts qualifying distributions (s 25BB), so layer 1 largely disappears. |
| Return of capital | Treating every distribution as a dividend. | A distribution out of contributed tax capital (CTC) is not a "dividend" (s 1 definition). It reduces the shareholder's base cost (para 76B) and attracts no dividends tax. |
| Timing | Taxing on the declaration date. | The tax arises when the dividend is paid, or becomes due and payable if earlier (s 64E(2)). The withholding agent pays SARS by the last day of the following month (s 64K), with a DTR01 return. |
| Dividend stripping | Assuming intra-group exempt dividends are always harmless. | Exempt dividends extracted shortly before a share sale can be added back to the seller's proceeds or income (para 43A, s 22B). Company-to-company exemption is not a planning free pass. |
| Foreign dividends | Applying dividends tax to a dividend from a US company. | Foreign dividends fall under s 10B (25/45 exempt, max effective 20% in normal tax). Dividends tax only applies to foreign companies listed on the JSE, and s 64F(1)(j) exempts non-residents from it. |