On 30 July 2026, the National Treasury and South African Revenue Service (SARS) introduced the Draft 2026 Taxation Laws Amendment Bill, which proposes a material change to the South African tax treatment of certain transactions involving companies operating in Special Economic Zones (SEZs). Unlike section 31, which generally applies to affected transactions between a South African resident and a nonresident, proposed section 31B would introduce an arm's-length regime for specified transactions between two South African-resident connected companies in which only one benefits from the reduced 15% SEZ corporate income tax rate.

What is the current rule?

Section 12R currently contains a quantitative anti-avoidance rule. A company is disqualified from the 15% SEZ corporate income tax rate if more than 20% of its deductible expenditure is incurred with, or more than 20% of its income is received or accrued from, connected persons that are South African residents, or nonresidents to the extent that the amounts are attributable to a South African permanent establishment.

In practical terms, the current rule focuses on the volume of connected-party transactions rather than whether the pricing itself is arm's length. Once the 20% threshold is exceeded, the company can lose access to the 15% rate even if the arrangements are commercially driven and market related. This may affect integrated South African operating models in which manufacturing, procurement, distribution, logistics or support functions are performed by different group companies.

What would change under proposed section 31B?

The proposed provision would apply if all the following conditions are met:

• Two connected companies are South African tax residents
• One company qualifies for the 15% SEZ corporate income tax rate
• The other company does not qualify for the reduced SEZ rate
• The transaction, operation, scheme, agreement or understanding differs from what independent parties would have agreed at arm's length

If the provision applies, and the non-arm's-length terms result in a tax benefit, the non-SEZ company would be required to calculate its taxable income or tax payable as if arm's-length terms had applied.

The proposal would replace the current 20% gateway with a transaction-based arm's-length test. This is significant because it extends transfer pricing principles to relevant South-African-company-to-South-African-company dealings, whereas section 31 generally addresses resident-to-nonresident affected transactions. This wider domestic focus may affect groups whose local intercompany arrangements have not historically been supported by formal transfer pricing analysis.

Why the proposal matters

The proposed rules address profit shifting from a company taxed at the standard corporate income tax rate to a connected SEZ company taxed at 15% through non-arm's-length domestic pricing. Affected groups may therefore face greater scrutiny with regard to their goods and services transactions, including:

• Management, technical, administrative and shared services
• Sales, distribution and procurement arrangements
• Manufacturing, toll-manufacturing and contract-manufacturing arrangements
• Logistics, warehousing and supply-chain services
• Cost allocations connected with the supply of goods or services

If enacted, taxpayers may need to consider their obligations beyond the current 20% threshold. SARS would be able to test the pricing and terms of relevant domestic transactions against arm's-length conditions. Groups should therefore be able to explain the commercial rationale, pricing method and allocation of profit by reference to the functions performed, assets used and risks assumed by each entity.

Interaction with Pillar Two global minimum tax

The preferential 15% SEZ corporate income tax rate should also be considered alongside South Africa's Pillar Two global minimum tax rules. These rules apply to in-scope multinational enterprise groups with consolidated revenue of at least €750m and test a jurisdictional effective tax rate calculated under the Global Anti-Base Erosion (GloBE) rules, rather than the domestic statutory rate alone. Although the SEZ rate is 15%, incentives, permanent differences and other GloBE adjustments may cause the South African jurisdictional effective tax rate to differ from 15%.

Timing

The proposal is expected to apply from 1 January 2027 for assessment years commencing on or after that date. As the measure remains part of draft legislation, its final wording and commencement date may change during the legislative process.

Next steps

Affected groups should consider taking the following steps, depending on their particular circumstances:

• Identify in-scope arrangements. Map domestic transactions between SEZ and non-SEZ connected companies.
• Test the pricing. Assess whether prices and contractual terms are arm's length.
• Review substance and contracts. Confirm that agreements, conduct, decision-making and risk control are aligned.
• Strengthen support. Update functional analyses, benchmarking allocation keys and records.
• Model the impact. Quantify potential adjustments and required changes before implementation.
• Assess Pillar Two interaction. For in-scope MNE groups, model the South African GloBE effective tax rate and any domestic minimum top-up tax exposure.