Effective tax on foreign dividends, capped at a 20% maximum effective rate.
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Why foreign dividends are taxed differently from local ones
If you own shares in a South African company, the dividend you receive has already been hit by 20 percent dividends withholding tax, and that is usually the end of it. Foreign dividends work differently. A dividend from an offshore company, an S&P 500 holding, a London-listed share, or a global ETF that distributes income, does not go through the local dividends tax. Instead it gets added to your taxable income and taxed at your personal marginal rate. Left there, a top earner would pay up to 45 percent on a foreign dividend versus 20 percent on a local one, which would be a harsh penalty for diversifying offshore. To soften that, the law gives a partial exemption so the effective rate on a foreign dividend tops out at 20 percent, matching the local dividends rate at the highest income level. This calculator works out your effective rate and what you actually keep.
The four-ninths exemption, explained
The mechanism is a fixed taxable fraction. Rather than exempting a flat rand amount, the rules exempt a portion of every foreign dividend so that at the very top marginal rate the tax works out to exactly 20 percent. The calculator derives the taxable fraction as the 20 percent maximum effective rate divided by the top marginal rate of 45 percent, which is 0.4444, or roughly four ninths. Your effective rate is then your marginal rate multiplied by that fraction. Because four ninths of 45 percent is 20 percent, a top earner pays the 20 percent cap, while someone on a lower marginal rate pays proportionally less. These rate figures, the 20 percent ceiling and the 45 percent top rate that sets the fraction, are the calculator's working assumptions and exactly the kind of numbers to confirm with SARS, the South African Revenue Service, before relying on them.
A R10,000 dividend on a 31 percent marginal rate
Say you receive a R10,000 foreign dividend and your marginal income tax rate is 31 percent. The calculator takes the four-ninths taxable fraction and multiplies it by your 31 percent rate, giving an effective rate of about 13.78 percent. Apply that to R10,000 and the tax is R1,378, leaving you with R8,622 net. Notice the effective rate is well below your 31 percent marginal rate, because only four ninths of the dividend is effectively taxed. Push the marginal rate up to 45 percent and the effective rate rises to the 20 percent cap, taking R2,000 of the R10,000.
The exemption that does not always apply
A trap worth knowing: the partial exemption is not available on every foreign dividend. It generally does not apply where you hold at least a 10 percent stake in the paying company, and dividends from certain property structures such as foreign real estate investment trusts can be fully taxable at your marginal rate. The calculator assumes the ordinary portfolio case, a small shareholding in a listed foreign company or fund, which is what applies to almost all individual investors. If you hold a large or controlling stake, or your offshore income runs through a trust, the maths changes and you should get advice rather than rely on the cap shown here.
Foreign withholding tax and the credit you can claim
The number this tool produces is the South African tax. Separately, the source country often withholds its own tax before the dividend reaches you. US shares, for example, commonly suffer a withholding rate before payout, reducible under the tax treaty if you complete the right broker form. South Africa generally lets you claim a foreign tax credit for that withholding, so you are not taxed twice, though the credit cannot exceed the local tax on that dividend. The practical tip is to file the treaty form your broker offers, because it lowers the foreign withholding at source. Treat the local effective rate here as the starting point and remember to factor in the foreign tax and the credit, confirming the current treaty rates and the credit rules with SARS.
Do I have to declare foreign dividends if my broker already withheld tax?
Yes. Foreign tax withheld at source does not remove your South African obligation to declare the dividend on your return. You report the gross foreign dividend, the local partial exemption is applied, and you then claim a foreign tax credit for the withholding. Skipping the declaration because tax was already taken abroad is a common and risky mistake, since SARS increasingly receives offshore account information through international exchange agreements.
Is a distribution from a global ETF a foreign dividend?
It depends on where the ETF is domiciled and what it holds. A distribution from an offshore-domiciled fund holding foreign shares is generally treated as a foreign dividend and gets the partial exemption. A locally domiciled ETF that invests offshore can pass through foreign dividends differently, and the tax certificate it issues will show the split. Check the fund's tax certificate rather than assuming, because the wrapper changes the treatment.