What constitutes a dividend?

Although there are several exclusions to the general rule, South Africa applies a withholding tax on dividends declared by companies at a rate of 20%. It is essential to appreciate that such a withholding obligation for companies do not arise only on “ordinary” dividends but that the concept of what constitutes a dividend, goes much wider.

The Income Tax Act defines a “dividend” as:


(a) by way of a distribution made by; or 

(b) as consideration for the acquisition of any share in…”

The ambit of the definition is wide and includes, for example, the waiver of a loan owed by a beneficial owner of a share to the company if the reason for the waiver is causally related to, and hence in respect of, a share in that company. The waiver represents the transfer of an amount by way of a distribution by the company. The individual components of the definition, therefore, require closer scrutiny.


A dividend can constitute the transfer of cash to a holder of shares or the transfer of assets (dividend in specie). The value to be placed on the transfer of assets as a dividend in specie is their market value.

Transferred or applied by a company that is a resident

The word “transferred” encompasses a transfer of ownership of an asset, while the word “applied” would, for example, include the payment of a debt owed by a holder of shares or a payment to a person providing a service to a holder of shares.

For the benefit or on behalf of any person

The amount must be for the “benefit or on behalf of any person”. A person would benefit from the receipt or accrual of a dividend, but a person who pays, for example, a market-related consideration for an asset transferred by a company does not derive a “benefit”, since there is an equal quid pro quo.

In respect of any share in that company

An amount that is unrelated to a taxpayer’s shareholding will not be derived “in respect of” a share. For example, the purchase by a company of an asset at an arm’s length price from a holder of shares on the same terms offered to the public would not constitute a dividend because the amount transferred by the company to that holder would not have been transferred “in respect of” the holder’s shares in the company but by virtue of the arm’s length acquisition by the company of the asset.

In summary, what constitutes a “dividend” is a comprehensive concept and has a variety of applications. Taxpayer companies should remain alert when any shareholder transaction is involved to ensure that they comply with their withholding obligations.
