If a cross border loan made to a trust by an individual or a company connected to that individual is considered an affected transaction* and subject to transfer pricing provisions contained in section 31:
- Section 7C will not apply to the market related rate of interest determined under section 31.
- However section 7C will still apply in cases where the market related rate of interest in terms of section 31 is lower than the SARS official rate as prescribed (currently 9.25%). This difference in rate will be subject to donations tax
* between a SA resident and a non-resident connected person, not on an arm’s length basis, and the transaction must result in a ‘tax benefit’.
This change is effective 1 January 2025
Therefore, taxpayers in preparation for their 2024/2025 tax obligations are reminded that Donations Tax resulting from their low or interest-free loans to trusts or companies with a February year-end will be due and payable to SARS by 31 March 2025.
Example
A loan of R100,000 is granted by a SA resident company to an offshore Trust. The SA resident company is connected to the beneficiary of the offshore Trust. In terms of the transfer pricing provisions contained in section 31, It is determined that a market related rate of interest for this loan is 8.25%.
This interest is subject to tax in the hands of the company at a corporate rate of 27%.
Because the market related rate of 8.25% is below the SARS prescribed rate of 9.25% there would be a donations tax implication in the hands of the company in terms of section 7C on the 1% interest rate differential.