The South African Revenue Service (SARS) on March 9 issued a draft Interpretation Note on the withholding tax on royalties paid by a resident to a non-resident for the use of intellectual property belonging to the non-resident.
This is part of an exercise to create uniformity between the different types of withholding taxes. The current withholding tax rate was increased to 15% with effect from 1 January.
It is important to appreciate that in South Africa, a royalty is not only payable in respect of an amount that is received or accrues in respect of the use or right of use of or permission to use any intellectual property, but also in respect of the imparting of or the undertaking to impart any scientific, technical, industrial or commercial knowledge or information, or the rendering of or the undertaking to render any assistance or service in connection with the application or utilisation of such knowledge or information.
A royalty payment is generally made only in respect of the right of use of the intellectual property and it does not afford the user any ownership rights in respect thereof.
In the draft Interpretation Note, it is indicated that an amount will also be regarded as a royalty if it is received by or accrued to a person who provides or agrees to provide any assistance or service relating to the application or use of the knowledge or information.
An amount will thus be a royalty if it is received in return for showing the user of intellectual property how to put the knowledge or information to use or if received by a person with industrial knowledge in exchange for demonstrating how to use an invention in an industrial project.
The withholding tax is only payable to the extent that a resident pays a royalty to a non-resident.
A resident includes a natural person and a person other than a natural person meeting certain requirements. A natural person will qualify as a resident if he is ordinarily resident in South Africa or physically present in South Africa for a specified number of days during a year of assessment as well as during the five-years preceding the current year of assessment.
A juristic person, which is incorporated, established, or formed in South Africa, or which has its place of effective management in South Africa, also qualifies as a resident.
South Africa source
The withholding tax on royalties only applies if an amount is received by or accrued to a person from a source within South Africa.
This will be the case if it:
- constitutes a royalty that is attributable to an amount incurred by a person that is a resident unless the royalty is attributable to a permanent establishment which is situated outside South Africa;
- constitutes a royalty that is received by or accrues to the person for the use or right of use of or permission to use in South Africa the intellectual property;
- is attributable to an amount incurred by a person that is a resident and is received by or accrues to this person for the imparting of or the undertaking to impart the relevant knowledge, unless the amount received or accrued is attributable to a permanent establishment which is situated outside South Africa; or
- is received by or accrues to the person for the imparting of or the undertaking to impart the relevant knowledge for use in South Africa.
The general principle is that the party that is liable for the payment of the withholding tax is the foreign person that becomes entitled to the royalty or to whom the royalty accrues.
South Africa withholding tax obligation
However, the obligation to withhold the royalty tax rests on the person that makes the payment of the royalty. The South African resident paying the royalty is thus obliged to withhold the withholding tax on the amount being paid to the foreign person. The tax so withheld is regarded as a payment made on behalf of the foreign person.
Even though the withholding tax rate is equal to 15%, this rate can be reduced to the extent that a tax treaty has been concluded between South Africa and the country of residence of the recipient.
For instance, in the case of the US, the withholding tax is reduced to zero percent. To make use of the beneficial rates contained in tax treaties, a specific form must be submitted to the person making payment of the royalty that a tax treaty exists and which reduced rate is applicable in respect of the royalty.
The withholding tax must be paid on the last day of the month following the month during which the royalty is paid. To the extent that the royalty is payable in a foreign currency, the amount must be translated to South African Rand at the spot rate on the date on which the amount is withheld.