Big tax change coming for companies operating in South Africa

South Africa plans to replace the strict 20% related-party transaction rule for Special Economic Zones (SEZs) with a domestic transfer pricing system.

The proposed rules will focus on whether related-party transactions are conducted at arm’s length, rather than automatically removing the tax incentive when transactions exceed a set threshold.

This was explained by Johannesburg-based law firm Shepstone & Wylie Partner Freek van Rooyen and Tax Executive Johan Kotze.

SEZs were created to encourage investment in manufacturing and industrial hubs by offering qualifying companies a reduced corporate income tax rate of 15%.

However, the tax incentive also created a risk that companies could shift profits from entities paying the standard corporate tax rate into lower-taxed SEZ companies.

To address this, section 12R(4)(c) was introduced in 2016. Under the existing rule, a qualifying company can lose its SEZ tax incentive.

This can happen if more than 20% of its deductible expenditure or income is attributable to transactions with a connected South African resident or a South African permanent establishment of a non-resident.

While the rule is simple, it can also affect companies that are conducting legitimate business with related companies.

Modern businesses often split functions such as manufacturing, procurement, logistics, intellectual property, sales, and marketing between different companies within the same group.

Multinational companies may also have only part of their supply chain located in an SEZ, Van Rooyen and Kotze noted.

This means a company could lose its tax incentive simply because it has a significant number of ordinary commercial transactions with related South African companies.

The 2026 Draft Taxation Laws Amendment Bill proposes replacing this system with a new section 31B, they explained.

Instead of asking how much related-party business a company conducts, the proposed rule asks whether those transactions are priced on an arm’s length basis.

The provision would apply to domestic transactions between a qualifying SEZ company and a connected South African resident that is not a qualifying SEZ company.

If the terms of the transaction differ from those that independent companies would have agreed to, and the difference creates a tax benefit, the taxpayer’s taxable income can be recalculated.

In simple terms, the proposed rule targets how related companies price transactions, rather than simply the fact that they transact with each other.

A new form of domestic transfer pricing

South Africa’s existing transfer pricing rules have traditionally focused on cross-border transactions, Van Rooyen and Kotze explained.

The proposed section 31B would bring similar principles into domestic transactions. The key issue is the difference in tax rates.

An SEZ company can pay tax at the preferential 15% rate, while a related company outside the SEZ is generally subject to the ordinary corporate tax rate.

This rule creates an incentive to shift profits between the companies by manipulating the prices of goods or services.

Van Rooyen and Kotze said the proposed rule is intended to operate consistently with the OECD Transfer Pricing Guidelines and the United Nations Practical Manual on Transfer Pricing.

They also explained that the proposed change reflects a broader shift in how governments approach SEZ tax incentives.

The 2026 Draft Explanatory Memorandum notes that several countries with SEZ regimes do not automatically withdraw tax incentives when companies engage in related-party transactions.

Instead, they rely on transfer pricing and substance requirements. Under current South African law, related-party transactions become problematic once they exceed a specific numerical threshold.

The proposed rule instead recognises that such transactions are a normal part of modern business. The concern is whether the transactions are priced at levels that would be observed between independent companies.

This means legitimate businesses could continue using related companies without automatically putting their SEZ tax incentive at risk.

The proposed change could give SEZ companies more flexibility, but it would also create a new compliance requirement.

Businesses may need to demonstrate that their related-party transactions are conducted on arm’s length terms, van Rooyen and Kotze said.

For companies, this could mean greater scrutiny of pricing arrangements, documentation, and the structure of transactions between related entities.

However, this may be preferable to the current system, where exceeding the 20% threshold can result in the loss of the entire SEZ tax incentive.

The proposed section 31B, therefore, represents a shift towards a more targeted approach to preventing profit shifting, van Rooyen and Kotze added.

Rather than treating all significant related-party transactions as a potential problem, the proposed rules would focus on transactions that actually distort taxable income.