U.S.-South Africa tax treaty: withholding rates on interest, dividends, royalties and services

What sets the U.S.-South Africa treaty apart

The 1997 U.S.-South Africa treaty exempts interest and royalties at source and caps dividends at 5% and 15%, but it has two rules found in few U.S. treaties. U.S. pensions paid to South African residents can be taxed by the U.S. at up to 15%, unless an early-withdrawal penalty applies. And South African companies providing services in the U.S. create a permanent establishment after 183 days. The performer threshold is also low, at $7,500 a year.

Common payments at a glance

Assumes the payee is the beneficial owner, is resident under the treaty, meets its limitation-on-benefits article and gives a valid W-8BEN, W-8BEN-E or Form 8233. Article references are to the treaty as amended.

Rates on investment and other income

Treaty in effect generally from Jan. 1, 1998. Protocols in effect from: none listed. IRS country code SF.

"n/a" means the payment type is not covered by the royalty article: equipment leasing is business profits (no withholding without a permanent establishment) or other income. Superscript letters are the IRS's own conditions, listed at the end of this page.

Pay for personal services performed in the United States

Each row is an exemption the treaty gives, with the limits the IRS lists. All conditions in a row must be met; if any is not, the pay is withheld on at 30% (contractors) or under the wage rules (employees). Services performed entirely outside the United States are foreign-source and need no treaty claim.

Reading the U.S.-South Africa treaty as a payer

Documents and dates

The convention was signed in Cape Town on February 17, 1997. The previous 1946 treaty had been terminated in 1987 under the Comprehensive Anti-Apartheid Act. The IRS tables give January 1, 1998 as the general effective date; withholding applies to amounts paid or credited from that date. The treaty covers U.S. federal income taxes but not Social Security taxes.

Residence and transparent entities

A South African resident is an individual ordinarily resident there, or a company incorporated or effectively managed there. A company resident in both countries is resident where it is incorporated, so a U.S. company managed in South Africa is a U.S. resident (Art. 4(3)). Income through an entity transparent under either country's law counts as derived by a resident only to the extent the residence country taxes it as a resident's income (Art. 4(1)(d)). The saving clause applies only to the U.S., because South Africa chose not to have one.

Limitation on benefits

Article 22 qualifies individuals, governments, companies whose shares in the classes making up more than half the vote and value are regularly traded (including on the Johannesburg Stock Exchange), subsidiaries at least 50% owned by such companies, charities, pension funds with more than half their beneficiaries resident in either country, and entities passing an ownership and base erosion test. Income connected with an active business in South Africa qualifies, with a safe harbor where the asset, income and payroll ratios each reach 7.5% and average more than 10%. There is no derivative benefits or headquarters test. A triangular rule caps interest and royalties at 15% where a South African company earns them through a low-taxed third-country branch (Art. 22(6)).

Dividends, interest and royalties

Dividends are 5% for a company holding directly at least 10% of the voting stock and 15% otherwise (Art. 10(2)); there is no 0% rate. RIC dividends are 15%. REIT dividends get 15% only for an individual holding less than 10%; everyone else pays the statutory 30%. Dividends owned by either government, its subdivisions or a government pension fund that does not control the payer are exempt (Art. 10(8)).

Interest is taxable only in South Africa (Art. 11(1)), except U.S. contingent interest that is not portfolio interest (up to 15%) and REMIC excess inclusions (domestic law). Royalties are taxable only in South Africa (Art. 12(1)); the definition expressly includes computer software, films and audio or video tapes or disks. The technical explanation excludes equipment leasing, shrink-wrap software and technical or professional services.

Services

Services furnished through employees or other personnel, including consultancy, create a permanent establishment if they continue for the same or a connected project for more than 183 days in any 12-month period beginning or ending in the tax year (Art. 5(2)(k)). Construction projects and drilling rigs count after 12 months. An individual's professional fees are taxable only through a fixed base, but a stay of more than 183 days in any 12-month period is treated as a fixed base and all income from U.S. activities is attributed to it (Art. 14).

Employees are exempt only if present 183 days or fewer in any 12-month period, paid by a non-U.S. employer and not borne by a U.S. permanent establishment (Art. 15(2)). Directors' fees may be taxed by the company's country for services rendered there (Art. 16). Performers and athletes are taxable once gross receipts for the year, including reimbursed expenses, exceed $7,500, and then on the whole amount; publicly funded visits are exempt (Art. 17).

Pensions and Social Security

The U.S. may tax a pension paid to a South African resident at up to 15% of the gross, provided it is not subject to a penalty for early withdrawal; if the section 72(t) penalty applies, the Code's normal rules apply (Art. 18(1)(a)). The technical explanation covers 401(a) plans, IRAs including SEPs, 457, 403(a) and 403(b) plans and tier 2 Railroad Retirement, periodic or lump sum. Social Security is taxable only in the paying country (Art. 18(2)), so U.S. Social Security paid to a South African resident is withheld on. Purchased annuities are taxable only in the residence country unless bought in the other country while resident there.

Students and other income

Students and business trainees present for full-time education or training are exempt only on payments from outside the U.S. for maintenance, education or training; trainees for one year (Art. 20). There is no teacher or researcher article. Other income, including gambling winnings and punitive damages, is taxable only in South Africa (Art. 21). Gains other than on U.S. real property or permanent establishment assets are taxable only in the residence country (Art. 13).

Where payers get it wrong

• Exempting a U.S. pension paid to a South African resident. The U.S. may tax it at up to 15%, or fully if the early-withdrawal penalty applies.
• Missing the services permanent establishment. A South African company's staff working on a U.S. project for more than 183 days in 12 months make its fees taxable here.
• Treating the $7,500 performer threshold as an allowance. Above it, the whole amount is taxable.
• Applying 5% or 15% to REIT dividends held by a company. Only individuals holding less than 10% get 15%.
• Treating equipment rent or shrink-wrap software as royalties. Both are business profits.

Read from the treaty documents: Convention of Feb. 17, 1997; Treasury Technical Explanation. Texts and technical explanations: United States income tax treaties, A to Z.

How the payee claims these rates

• Individuals claim a reduced rate on interest, dividends, royalties or pensions in Part II of Form W-8BEN: treaty country, article, rate and any conditions. Most claims need a U.S. TIN or a foreign TIN on the form.
• Entities claim in Part III of Form W-8BEN-E, which also asks which limitation-on-benefits test the entity meets (the South Africa treaty's LOB provision is Article 22).
• Pay for services performed in the United States by an individual is exempted on Form 8233, not the W-8BEN, one form per tax year and per payer.
• The payer reports the payment on Form 1042-S with the income code shown above and chapter 3 exemption code 04 (exempt or reduced withholding under a tax treaty). From 2026 an exemption code is required whenever less than 30% is withheld.

Questions payers ask

The IRS notes behind the figures

Notes to the rates (IRS Table 1)

• g Exemption or reduced rate does not apply to an excess inclusion for a residual interest in a real estate mortgage investment conduit (REMIC).
• l For South Africa, the reduced rate applies to pension distributions if the distribution is not subject to a penalty for early withdrawal. Annuities are not taxable if purchased while the annuitant was not a resident of the United States.
• u If enterprise earns income from leasing of equipment in the conduct of a trade or business, covered by Business Profits article (net tax). If passive income from the leasing of equipment, and not in Royalty article, covered by the Other Income article, if any. In Pakistan payment for TV broadcasting rights are covered by the Royalty article but not rental income from motion picture films.
• w The rate in column 6 applies to dividends paid by a regulated investment company (RIC) or a real estate investment trust (REIT). However, that rate applies to dividends paid by a REIT only if the beneficial owner of the dividends is an individual holding less than a 10% interest (25% in the case of Portugal, Thailand, and Tunisia) in the REIT.
• jj The rate is 15% (10% for Bulgaria and Spain; 30% for Austria, Germany, and Switzerland) for contingent interest that does not qualify as portfolio interest. In general, contingent interest is interest that is determined with reference to (a) receipts, sales, income, profits or other cash flow of the debtor or a related person, (b) any change in the value of any property of the debtor or a related person, or (c) any dividend, partnership distribution, or similar payment made by the debtor or related person. For Sweden and Germany, contingent interest is covered by the dividends article of the treaty.

Notes to the services table (IRS Table 2)

• 7 Exemption does not apply to the extent income is attributable to the recipient's fixed U.S. base. For residents of Korea and Norway, the fixed base must be maintained for more than 182 days (for Norway, 30 days in the case of the exploration or exploitation of the seabed and sub-soil and their natural resources); for residents of Morocco, the fixed base must be maintained for more than 89 days.
• 11 Applies only to full-time student or trainee.
• 12 Fees paid to a resident of the treaty country for services performed in the United States as a director of a U.S. corporation are subject to U.S. tax.
• 17 The exemption does not apply if the employee's compensation is borne by a permanent establishment (or in some cases a fixed base) that the employer has in the United States.
• 30 Exemption does not apply if gross receipts (or compensation for Portugal and Venezuela), including reimbursements, exceed this amount. Income is fully exempt if visit to the United States is substantially supported by public funds of the treaty country or its political subdivisions or local authorities.
• 45 The time limit pertains only to an apprentice or business trainee.
• 58 Remuneration derived by a resident of a contracting State in respect of an employment as a member of the regular compliment of a ship or aircraft operated in international traffic may only be taxed in that State.

Transcribed from the IRS Tax Treaty Tables. Treaty texts and technical explanations: United States income tax treaties, A to Z.

Other treaty countries

Australia · Austria · Bangladesh · Barbados · Belgium · Bulgaria · Canada · Chile · China · Commonwealth of Independent States · Cyprus · Czech Republic · Denmark · Egypt · Estonia · Finland · France · Germany · Greece · Iceland · India · Indonesia · Ireland · Israel · Italy · Jamaica · Japan · Kazakhstan · Latvia · Lithuania · Luxembourg · Malta · Mexico · Morocco · Netherlands · New Zealand · Norway · Pakistan · Philippines · Poland · Portugal · Romania · Slovak Republic · Slovenia · South Korea · Spain · Sri Lanka · Sweden · Switzerland · Thailand · Trinidad and Tobago · Tunisia · Turkey · Ukraine · United Kingdom · Venezuela