Deemed Dividends on Interest-Free Loans

In South Africa, companies often advance funds to shareholders or connected persons through interest-free or low-interest loans. While this might seem like a simple arrangement, the Income Tax Act treats it differently for tax purposes.

What Are Deemed Dividends?

When a company grants an interest-free or low-interest loan to a shareholder (or someone related to them), SARS may regard the foregone interest as a deemed dividend. This falls under section 64E(4) of the Income Tax Act.

How It’s Calculated

• SARS uses the official interest rate (linked to the repo rate, currently repo + 1%).
• Any shortfall between the official rate and the actual rate charged is deemed to be a dividend.
• This deemed dividend is subject to Dividends Tax at 20%, payable by the company.

Example:
If a company lends R1,000,000 interest-free when the official rate is 11.75%, the foregone annual interest is R117,500. SARS treats this as a deemed dividend, and the company must withhold R23,500 (20%) as Dividends Tax.

Why It Matters

• Increases compliance obligations for companies.
• Prevents tax-free value transfers to shareholders through loans.
• Highlights the importance of structuring shareholder loans correctly.

Contact PRNC to ensure your shareholder loans are tax-compliant and avoid unexpected deemed dividend liabilities.