Corporate Income Tax in South Africa: A Strategic Approach in the 2025 Budget

The 2025 Budget proposes a balanced Corporate Income Tax (“CIT”) strategy, prioritising revenue stability without raising the 27% rate, which could undermine South Africa’s competitiveness. Ranking 13th globally for CIT as a share of GDP, above OECD and African averages, the country opts for alternative revenue measures like a VAT increase to avoid deterring investment amid commodity-driven volatility. Here’s a concise look at the key proposed changes and their business implications.

Key Developments

• Steady CIT Rate: Maintaining the rate signals caution, preserving South Africa’s investment appeal despite revenue pressures.

• Global Minimum Tax Act (2024): Effective since 2024, this OECD-aligned reform mandates a 15% minimum effective tax rate for multinationals with revenues over €750 million. Top-up taxes to SARS start in 2026/27, projected to add R8 billion, curbing profit-shifting without altering the headline rate.

• Revenue Resilience: Despite a 28% mining sector drop in 2024/25, CIT collections exceeded forecasts, buoyed by financial and manufacturing profits. Projections show growth from R316.4 billion in 2024/25 to R391.1 billion by 2027/28, though volatility persists.

  
  

Technical Adjustments

The Budget proposes several CIT-related proposals to address loopholes, enhance clarity, and align with international norms. These include:

• Anti-Avoidance Enhancements: The government targets structures exploiting third-party backed shares, where dividends are reclassified as taxable income unless used for qualifying purposes. New measures will counter circumvention, ensuring these arrangements don’t erode CIT revenue. Similarly, the definition of “hybrid equity instruments” (e.g., preference shares with debt-like features) will be tightened to prevent taxpayers from dodging anti-hybrid rules, reinforcing tax base integrity.

• Interest Limitation Rules: Clarifications to sections 23M and 23N refine interest deduction limits. The definition of “interest” will align with section 24J for consistency in calculating “adjusted taxable income,” while carve-outs will extend to back-to-back lending without controlling relationships. Foreign exchange differences on restricted debts will also be addressed, ensuring limits apply when no creditor accrual occurs. These changes curb excessive deductions and provide clearer guidelines.

• Controlled Foreign Company (“CFC”) Adjustments: Gaps in CFC rules are tackled by ensuring the section 9H exit charge triggers when CFCs acquire shares in South African holding companies, closing a loophole. The comparable tax exemption—waiving CFC income imputation if foreign tax is at least 67.5% of South Africa’s—will now factor in shareholder tax refunds, aligning with global anti-profit-shifting efforts and complementing the global minimum tax.

• Corporate Reorganisations: Special rollover relief for listed shares in asset-for-share transactions will be restricted to shareholders owning less than 20% of the target company’s equity, aligning with the 2010 policy intent. A review of tax-free transfers to collective investment schemes (“CISs”), flagged in a 13 December 2024 discussion document, aims to curb unintended tax avoidance where gains remain untaxed on disposal.

• Financial Sector-Specific Measures: For “covered persons” (e.g., banks) under IFRS 9, dividends hedging tax-deductible liabilities will be taxed to match accounting treatment, closing an arbitrage gap. The tax treatment of first loss after capital (“FLAC”) instruments, mandated by the Prudential Authority, will be clarified to ensure compliance and support financial sector stability.

• Assessed Loss Set-Offs: Since 2023, assessed losses are capped at 80% of taxable income (or R1 million, whichever is higher). Uncertainty around their sequencing with deductions like donations (section 18A) or insurer policyholder fund transfers prompts a proposed clarification. This aims to ensure a logical order—likely applying losses before other deductions—reducing ambiguity and aiding companies in tax planning, especially those recovering from prior losses.

Conclusion

The 2025 Budget avoids rate hikes, favouring long-term stability through global tax reforms and detailed technical enhancements. By integrating the global minimum tax and addressing domestic loopholes, South Africa safeguards revenue without inhibiting growth, challenging businesses to adapt to a shifting tax landscape.