Anticipating the widespread effect of the new withholding tax on interest, extensions to its application have been promulgated. The latest Taxation Laws Amendment Bill proposes a further extension of the implementation date to 1 March 2015.
Payments of interest to or for the benefit of a foreign person by a South African borrower will be subject to a withholding tax on the payments. This means that foreign lenders to South African borrowers will face a reduction of their interest receipts because tax will be withheld by the borrower.
Generally, comprehensive loan agreements provide for reductions to be grossed up to place the lender in the same position it would have been had the deduction not been made. The economic effect is that the borrower has to pay more to put the lender in the same position.
The extension will give South African borrowers with foreign debt time to discuss with their lawyers alternative structuring opportunities to mitigate the effect of this tax.
