Dormant Dilemmas: Unravelling the Tax Challenges Faced by Inactive Companies in South Africa

 

The recent measures implemented by the South African Revenue Service (SARS) have brought to light the complexities surrounding late-submission penalties, impacting all registered companies, whether actively engaged in trade or lying dormant.

 

A dormant company, by definition, is one that has remained inactive throughout the full year of assessment. With no business activities generating revenue, it becomes surprisingly easy for such entities to slip into obscurity, often accompanied by the entanglements of administrative red tape.

 

The most recent development from SARS involves the imposition of penalties for late submission of income tax returns outstanding from 2007 to 2020. Effective from 1 December 2022, these penalties not only come into play upon submission delays, but continue to accumulate until the outstanding tax returns are filed. Ranging from R250 to R16 000 per month, these penalties are calculated based on SARS’s estimation of taxable income and persist even after the submission of tax returns.

 

For dormant companies that have not traded for several years and are behind on tax submissions, the repercussions can be substantial. SARS implements penalties based on the most recent tax return received. Even in the best-case scenario, where the company has neither made a profit nor incurred a loss, a penalty of R250 per month is levied.

 

De-registering a dormant company, however, does not absolve it of tax obligations. Directors and business owners are urged to verify their directorship status with the Companies and Intellectual Property Commission (CIPC) and engage tax practitioners to conduct a comprehensive tax status compliance check, confirmed by a tax clearance certificate.

 

Closing a dormant company in South Africa, while a relatively straightforward process, demands careful adherence to the correct procedures to ensure proper dissolution and compliance with all legal obligations. Here’s a step-by-step guide:

 

  1. Check the Company’s Status: Verify that the company is indeed dormant, with no business activities or revenue generation in the past financial year.
  2. Notify the CIPC: Inform the CIPC of the intention to close the company via email or by submitting a form in person, with a turnaround time of approximately 6 months.
  3. Supporting Documents: Provide essential documents, including a resolution/letter on company letterhead signed by all directors, a tax clearance certificate, and certified copies of each director’s ID not older than three months.
  4. Pay Outstanding Fees and Taxes: Settle all outstanding fees and taxes owed to CIPC and the South African Revenue Service (SARS) before the closure request can be processed.
  5. File Necessary Documents: Submit required documents to the CIPC, including a ‘Notice of Intention to De-register a Company’ form and a ‘Notice of Resolution to De-register a Company’ form.
  6. Wait for Approval: The CIPC will review the request, and upon approval, initiate the de-registration process.
  7. Dispose of Company Assets: If the company owns assets such as property or equipment, dispose of them before full dissolution, either by selling or transferring to another entity.
  8. Notify Creditors and Shareholders: Inform creditors and shareholders of the de-registration through the Government Gazette or individual letters.
  9. De-register with SARS: Notify SARS of tax compliance and request de-registration through a letter, eFiling, or by setting up an appointment with a SARS consultant. It is crucial to note that de-registering with CIPC does not automatically de-register the company with SARS. Compliance with tax returns is a prerequisite, and professional assistance from an accredited tax practitioner is advisable to ensure full compliance and a seamless de-registration process.

In conclusion, navigating the dormant company landscape in South Africa requires meticulous attention to detail and proactive measures to address potential tax pitfalls.  Do not hesitate to contact local TdP director, Jaco Barnard at jaco@pe.tdp.co.za for professional assistance.