SAPPI LIMITED

A further tax which may be relevant to a shareholder is the Secondary Tax on Companies (‘‘STC’’),
which is imposed in terms of the ITA on a company in respect of dividends declared.
STC is to be replaced with a dividend withholding tax (‘‘DWT’’) on a date to be announced. At time of
publication hereof, there was no clear indication of when the DWT will come into effect. Although earlier
indications were that it would come into effect during the latter half of 2010, the legislation will only come
into effect at least three months after the publication of a notice in the Government Gazette and will apply
to dividends paid on or after that date. The DWT will thus come into effect some time during 2011 at the
earliest.
In terms of the DWT legislation (which has been included into the ITA but has not yet become
effective), the DWT will be imposed on the shareholder and not on the company.
Basis of Taxation
South Africa applies a residence basis of taxation in terms of which residents are subject to income
tax on their worldwide income and CGT on their worldwide capital gains. Non-residents are taxed on
their South African source (or deemed source) income. Certain categories of income and activities are
exempt from taxation.
South African tax residents are thus exposed to South African tax in respect of the profits from the
disposal of their worldwide assets. Non-residents are generally only exposed to South African tax in
respect of the sale of an asset if the asset in question is situated in South Africa since the sale would
otherwise generate foreign source income.
The shares issued by a South African resident company would generally be regarded as a South
African asset, even if the share may be listed on a foreign stock exchange. Therefore, the sale of such an
asset may generate South African source income. However, the concept of ‘‘source’’ is not defined and
the factual circumstances determine the location of the source of income.
Whatever, the source of such profits, non-residents are not subject to CGT on the sale of capital
assets held in South Africa except in respect of immovable property situated in South Africa (or any
interest or right in such immovable property) and any assets attributable to a permanent establishment
of that non-resident in South Africa. For CGT purposes, an asset is widely defined to include assets that
are movable, immovable, corporeal or incorporeal and rights or interests in such property, but excludes
certain limited items.
In the case of a natural person, residence is established either when the person can be regarded as
‘‘ordinarily resident’’ in South Africa (in accordance with case law tests) or when the person satisfies a
physical presence test in terms of which he/she becomes resident by virtue of his/her physical presence
in South Africa for a certain prescribed period of time.
In the case of a legal person, residence is established by virtue of incorporation or formation, or by
having a place of effective management, in South Africa. Excluded from the definition of ‘‘resident’’ are
persons or entities which are, in terms of a double taxation agreement (‘‘DTA’’) entered into by South
Africa, deemed to be exclusively a resident of another country.
A non-resident may be protected by the provisions of a DTA from an exposure to South African tax.
South Africa and the United States concluded a DTA in 1997 (‘‘the US DTA’’). In terms of the US
DTA, an individual may become a South African resident if he or she became ordinarily resident in South
Africa, subject to the tie-breaker rules under Article 4 of the US DTA. A company may be resident in
South Africa if it was incorporated or effectively managed in South Africa, subject to the tie-breaker rule.
In terms of the tie-breaker rule, a company that is a resident of both South Africa and the United States
will be deemed to be a resident of the country in which it is incorporated.
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