Tax and SARS knowledge base
Royalty payments to non-residents: withholding tax
How does a company apply withholding tax when it pays royalties to a non-resident?
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Direct answer
SARS states that royalties paid are subject to a final withholding tax at 15%. A company paying a non-resident needs to determine whether the payment is a royalty, identify the withholding agent and recipient, and apply the current SARS process for payment and WTR01 filing.
SARS also says that a Withholding Tax on Royalties Declaration, or WTRD, generally must be completed by the foreign person and submitted to the withholding agent before an exemption or reduced rate may be used in the calculation. SARS identifies a specified headquarter-company intellectual-property exemption for which WTRD is not required. Do not apply a treaty rate simply because the recipient is based outside South Africa.
What this means in practice
The first question is classification. A payment described in a contract as a licence, software charge, technical fee, marketing fee, management fee or intellectual-property fee may need detailed analysis. The label used on an invoice is not conclusive. Before paying, review the agreement, what the recipient provides, who owns or uses the intellectual property, where the parties are resident and whether the payment is split between different services or rights.
If the standard SARS rate applies, build the withholding into the payment process. Finance should not pay the foreign party gross and only later ask whether tax should have been withheld. The agreement should be checked for clauses addressing tax withholding, gross-up, information requests and the recipient's obligation to provide the declarations needed for any treaty treatment.
A reduced treaty rate or exemption generally must be documented before calculation. SARS specifically requires the foreign person to complete WTRD and give it to the withholding agent before an exemption or reduced rate is applied, subject to its specified headquarter-company intellectual-property exception. SARS says the withholding agent must keep WTRD for five years because SARS may ask for it.
Step-by-step
- Review the proposed payment before release.
Obtain the signed agreement, invoice, statement of work and payment approval. Identify the legal recipient, its country of residence, the exact right or service, the amount, payment date and currency. Separate royalty components from other charges where the contract and facts support that distinction.
- Confirm the company’s withholding position.
Treat classification and source questions as tax questions, not only accounts-payable coding. Check the current SARS withholding-tax guidance and obtain specialist advice where software, know-how, mixed contracts, permanent establishments, connected parties or multiple jurisdictions are involved.
- Obtain any WTRD before applying a concession.
If a non-resident recipient claims a reduced treaty rate or exemption, generally require a completed WTRD declaration before the withholding calculation. Review it for completeness and consistency with the recipient, agreement and payment. SARS states that WTRD is not required for its specified exemption where a headquarter company pays a royalty for qualifying intellectual-property use or rights and the stated section 31 conditions are met. Obtain specialist advice before relying on that narrow exception. Retain a required declaration in the company compliance file for at least the five-year period stated by SARS.
- Calculate and withhold the amount.
Apply the standard 15% final withholding-tax rate shown by SARS unless a properly supported exception applies. Record the gross royalty, rate used, tax withheld, net paid, calculation date and person who approved it. Do not make the rate decision after funds have left the company.
- File WTR01 and provide payment proof through the current channel.
SARS says withholding tax must be paid before the end of the month following the month in which the royalty was paid, and the payer must submit WTR01 with the payment. If the final day is a weekend or public holiday, SARS says payment must be made on the last business day before it. Large-business taxpayers use the Large Business route stated by SARS; non-large-business taxpayers and tax practitioners have the contact channels shown on the current SARS page. Confirm the contact details and process at the time of filing, because operational channels can change.
- Reconcile and retain evidence.
Reconcile the WTR01, payment proof, bank payment, creditor ledger and contract. Retain any SARS acknowledgement, request or correction. Keep a rolling register of non-resident royalty payments so future payments do not depend on memory.
Documents and records to keep
Keep the contract, invoice, purchase approval, tax analysis, WTRD declaration, residency evidence, withholding calculation, WTR01, payment proof, bank record, correspondence and any treaty analysis. Include a calendar record for the payment and filing steps. Store documents in a retrievable file for the five-year period SARS identifies for WTRD.
Important limits and exceptions
This guide does not decide whether a particular payment is a royalty or whether a treaty applies. Those issues can depend on contract language, intellectual-property rights, the recipient’s residence and current treaty wording. A WTRD is generally evidence required by SARS for a reduced rate or exemption, but it is not a substitute for checking eligibility. The limited headquarter-company exception has its own statutory conditions.
Do not assume that every foreign supplier payment carries royalty withholding tax, or that every payment to a treaty-country recipient is exempt. Separate VAT, transfer-pricing, income-tax deduction, exchange-control and contractual issues may also apply.
When to get tailored advice
Get cross-border tax advice before paying material royalties, signing a new licence, applying a treaty rate, paying a connected party or dealing with mixed software and services arrangements. Obtain advice immediately if a payment was made without considering withholding tax.
TaxProof can help set up a document checklist and payment register. We cannot provide a treaty opinion or determine the tax character of a payment without reviewing the agreement and recipient facts.