Republic of South Africa

*Updated September 2020*

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• Legal system
• Inheritance and succession
• Estate planning
• Taxation
• Residence and domicile
• Other relevant information

Legal system

The principles embodied in the legal system are adapted from both Roman-Dutch and English law. The judiciary, enshrined in the Constitution of the Republic of South Africa, consists of the constitutional court (highest court of appeal in constitutional matters), the supreme court of appeal (highest court of appeal in non-constitutional matters, having only appeal jurisdiction), the high court (having inherent jurisdiction over all legal matters, including tax matters) and the inferior courts (that is magistrates’ and regional courts, having limited jurisdiction).


Apart from legislation, common law has developed through cases brought before the courts, the principles behind these decisions, the writings of the old Roman-Dutch writers, and certain aspects of English law. The judicial system is one whereby decisions of higher courts bind those of lower courts, and parties have a right of appeal from lower courts to higher ones. 


The South African legal system is split into the two branches of civil and criminal law. Civil law includes the laws of persons, families, obligations (including contract), torts, succession, mercantile matters, property and trusts. A system of specialised tribunals has been established to settle disputes, such as those involving employment issues. Tax matters are referred to the tax court, a court constituted by the provisions of the Income Tax Act.


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Inheritance and succession

Succession

A high premium is placed on the principle of freedom of testation in South African law: in contrast to the strict formalities for the execution of a will, its contents are left mainly to the discretion of the individual testator.

If a testator has left a valid will, their estate is inherited wholly or in part according to the rules of law of testate succession. However, the assets are first used to settle debts and meet other obligations such as those set out in the Maintenance of Surviving Spouses Act 27 of 1990 (the Maintenance Act), which entitles the surviving spouse to have a claim against the deceased estate for reasonable maintenance. This claim overrides the rights of heirs. The assets that can then be divided are the assets subject to distribution. The estate is administered by an executor in terms of the provisions of the Administration of Estates Act 66 of 1965 (the Estates Act).

If a person dies without leaving a will or an ante-nuptial contract containing provisions of inheritance, or the will that has been left is incomplete or inoperative, their assets are inherited in accordance with the rules of the law of intestate succession. The rules are contained in the Intestate Succession Act 81 of 1987 (the Succession Act), which determines who the deceased’s heirs are in as far as they did not do so themselves, or in as much as it is not possible to execute their legally valid wishes.

Family law and defined inheritance rules

As explained above, defined inheritance rules in regard to family law are governed, inter alia, by the following statutes: the Succession Act and the Laws of Succession; the Matrimonial Property Act 88 of 1984; the Estates Act; the Wills Act 7 of 1953 (the Wills Act); and the Maintenance Act.

Probate process

The probate process is governed by the Estates Act. It commences upon the death of the deceased (testate or intestate). The estate of the deceased (assets and liabilities) has to be liquidated and distributed. The administration of an estate may be described as the process by which the deceased’s liabilities are settled and the remainder (assets that can be distributed) is awarded and transferred to the beneficiaries. The administration process is conducted according to certain legal directives. The person who administers the estate is the executor. They do this under the supervision of the Master of the High Court.

Mental capacity

Section 4 of the Wills Act, which governs testamentary capacity, reads as follows: ‘Every person of the age of 16 years or more may make a will unless at the time of making the will he is mentally incapable of appreciating the nature and effect of his act, and the burden of proof that he was mentally incapable at that time shall rest on the person alleging the same.’ Mental incapacity includes mental illness, drunkenness and incapacity due to the effects of drugs.

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Estate planning

Use of trusts in estate planning

Trusts are popular in South Africa and are used for a number of reasons, particularly to protect assets and as an estate-freezing device. Note that this has been made much more complex with the introduction of para.7C, as noted above. Vesting and discretionary trusts can be established. Trusts are created by will or contract. A trust created by will is referred to as a testamentary trust, and a trust created by contract is referred to as an inter vivos trust or living trust.

A special trust is one created solely for the benefit of a person who suffers from any mental illness or serious physical disability that prevents that person from earning sufficient income to maintain that person, or a testamentary trust established solely for the benefit of minor children who are relatives of the deceased. Special trusts are taxed advantageously.

Use of foundations in estate planning

It is uncertain whether foundations are recognised in South African common law. It is also uncertain how the South African Revenue Service would treat them. 

Types of entities

Trusts, companies, close corporations, partnerships and joint ventures. A small business corporation, as defined in the Income Tax Act, is favourably taxed. 

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Taxation

Income tax system

Income tax is imposed on a resident’s worldwide income. Interest received by or accrued to a non-resident is tax exempt, provided that the individual is physically absent from South Africa for at least 183 days, or at any time during that year carried on a business through a permanent establishment in South Africa. Likewise, interest received by or accrued to a non-resident company is tax exempt unless such company carries on business through a permanent establishment in South Africa (such as branches of foreign companies). Dividends received by non-residents are subject to a withholding tax that may be reduced by double taxation agreements. Royalties, subject to double taxation agreements, attract a final withholding tax of 12 per cent. Residents require the approval of the Department of Trade and Industry and Exchange Control for payments of a royalty to a non-resident. Non-residents are taxed on South African-source income only, and capital gains tax (CGT) on property sold in South Africa.


Personal income tax rates

Individuals and special trusts are taxed according to a graduated rate, to a maximum of 45 per cent.

Corporate income tax rates

Companies and corporations are taxed at a flat rate of 28 per cent. Trusts at a flat rate of 45 per cent.

Capital gains tax

CGT is imposed on a resident’s worldwide assets at the following maximum effective rates:

• Individuals and special trusts at 18 per cent.
• Companies and corporations at 22.4 per cent.
• Trusts at 36 per cent.

Any capital gain made on a disposal of a primary residence when the proceeds received do not exceed ZAR2 million, is excluded from CGT. When the proceeds exceed ZAR2 million, the first ZAR2 million of profit is excluded from CGT if the property meets certain requirements; for example, it is owned only by a natural person.

The rate applicable to trusts may be reduced to that applicable to individuals by distributing capital gains to individual beneficiaries in the same tax year in which it is earned. This is subject to the risk that anti-avoidance legislation might apply. CGT, triggered on disposal of an asset, applies only to a non-resident’s immovable property or assets of a permanent establishment in South Africa.

Non-residents taxable on

• Royalties.
• Payments made to sportspersons and entertainers.
• CGT on the disposal of fixed property (or interest in such property) situated in South Africa.
• Income from a South African source.
• Withholding tax on dividends, although this is reduced by most double taxation agreements.

Withholding tax rate (non-treaty)

• 12 per cent on royalty payments.
• 5 to 10 per cent in respect of fixed property in South Africa acquired from a non-resident.
• 15 per cent on dividends in respect of payments made to non-resident sportspersons and entertainers.

Withholding tax rate (treaty)

5 to 10 per cent on dividends.

Taxation at death

The death of a taxpayer results in the termination of one taxpayer (the deceased) and the creation of another (the deceased estate). The deceased estate is taxable at rates applicable to natural persons but is entitled neither to the primary rebate nor the interest exemption. Section 25 (income after death) of the Income Tax Act and para.40 (capital gains on death) of the Eighth Schedule to the Income Tax Act deal with taxation at death.

There are probate fees, dealt with in the Estates Act. Death is a deemed disposal of capital assets for capital gains purposes. Any assets left to a surviving spouse are rolled over: they pass free of CGT, but at the previous base cost.

Other taxes

• Donations tax: 20 per cent on the first ZAR30 million and thereafter 25 per cent.
• Estate duty: 20 per cent on the first ZAR30 million and thereafter 25 per cent.
• Transfer duty on property: up to a maximum of 11 per cent.
• Dividends tax: 20 per cent.

New tax provisions

• If a natural person makes a loan to a trust to which they are connected, a donation will arise if the interest rate on the loan is less than the official rate of interest;
• This will also apply if a company, at the instance of the natural person, makes a loan to the trust;
• The provision has been extended to a loan made by the natural person to a company which such a trust (or a beneficiary of such a trust) holds at least 20 per cent of the equity shares (directly or indirectly) or is able to exercise 20 per cent of the voting rights;
• The amount of the donation is calculated as follows: Amount of loan x (interest at official rate, currently 7.75 per cent, minus actual interest charged) = donation;
• Loans by a non-resident person to a trust will not be subject to donations tax, because donations tax is only levied on 'any donation by any resident'.
• Certain updates have been effected to close loopholes.

Tax treaties

There are more than 66 treaties. Reference: www.sars.gov.za/Legal/International-Treaties-Agreements/Pages/default.aspx

Tax information exchange agreements

See above.

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Residence and domicile

Special rules on becoming resident

A resident is defined in s.1 of the Income Tax Act as either a person who is ‘ordinarily resident’ in South Africa (in other words, South Africa is their true home) or a non-resident who has spent a certain number of days in South Africa, that is more than 91 days in total in each of the current and previous five tax years, and more than 915 days in total during the previous five tax years. The days need not be consecutive. This is known as the physical presence test or ‘days test’. 

Special rules on ceasing residence

A non-resident is any person who is not resident (s.1 Income Tax Act). If a person is out of the country for more than 330 days, the person is no longer a resident (s.1 Income Tax Act).

Domicile concept for gifts and inheritance

Only tax residents are taxed in South Africa on worldwide income.

Taxation of holdings by non-residents on death and of gifts

See above.

Reporting/auditing requirements

In terms of the Companies Act 71 of 2008 there must be annual financial statements, annual returns and tax reporting. In specified instances audits are required.

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Other relevant information

Asset protection laws

In South Africa, asset protection is best provided by the creation of a discretionary trust as ownership is vested in the trustees and not the beneficiaries.

Foreign currency restrictions

Exchange control. This has an important effect on the tax affairs of taxpayers. Exchange control means simply that the residents of a country may not take funds out of the country or own foreign funds or assets without the permission of the South African Reserve Bank. There is therefore no free movement of money in and out of the country. Taxpayers over 18 years old in good standing may apply to take ZAR10 million out of the country every year. All South Africans may also take ZAR1 million out the country every year, in lieu of their travel allowance, as long as they are over 18 years old.

Emigration is a Reserve Bank process and does not affect the use of the person’s identity document or South African passport. Emigrants qualify for a cash allowance of ZAR1 million, which is equal to the travel allowance. They also qualify each calendar year for a ‘foreign capital allowance’ of ZAR20 million per family unit or ZAR10 million per person.

Distribution of income from a South African trust to an emigrant requires exchange control approval.

Foreign ownership restrictions

South Africa has relatively onerous exchange control restrictions and some apply to non-residents too. These restrictions are contained in the Currency and Exchanges Act 9 of 1933, in the Exchange Control Regulations, in the Orders and Rules and in the Exchange Control Rulings. Exchange control restrictions impact on most cross-border transactions involving local or offshore trusts that have a South African connection, like a South African settlor of an offshore trust, whether or not it owns South African assets, and consequently a good understanding of their application is required for compliant cross-border trust and estate planning. A paper is also soon to be released regarding limiting foreign ownership of property.

AML/due diligence and other requirements and regulatory procedures for advisors

• To establish a trust: there are procedures in terms of the Trust Property Control Act that would affect non-resident trustees.
• For incorporation: there are procedures in terms of the Companies Act 71 of 2008 that would affect non-residents.
• To open a bank account: there are procedures in terms of the Financial Intelligence Centre Act 38 of 2001 that would affect non-residents.

Key resources for further information

• Intestate Succession Act 81 of 1987
• Financial Intelligence Centre Act 38 of 2001
• Matrimonial Property Act 88 of 1984
• Administration of Estates Act 66 of 1965
• Wills Act 7 of 1953
• Estate Duty Act 45 of 1955
• VAT Act 89 of 1991
• Trust Property Control Act 57 of 1988
• Income Tax Act 58 of 1962
• Companies Act 71 of 2008
• Transfer Duty Act 40 of 1949
• Securities Transfer Act 25 of 2007
• Skills Development Levies Act 9 of 1999
• Unemployment Insurance Contributions Act 4 of 2002
• Securities Transfer Tax Administration Act 26 of 2007

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STEP branches in South Africa

There are two STEP branches in South Africa:

• STEP Cape Town
• STEP Johannesburg

Firms in South Africa

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Members in South Africa

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