SEZ rule shake-up: Government signals move from 20% related-party cap to an arm’s-length test
SEZ rule shake-up: Government signals move from 20% related-party cap to an arm’s-length test
Author: Mahlatse Masilu, Tax Consultant, BDO South Africa
What is changing?
Government has signalled a new approach to the Special Economic Zone (SEZ) cap for transactions with connected persons in section 12R(4)(c). Instead of applying the current threshold of “not more than 20% of income or deductible expenditure with connected South African persons (or with non-residents to the extent attributable to a South African permanent establishment)”, the proposal is to assess whether prices on sales to or purchases from connected parties outside the SEZ are market-related (arm’s length).
The stated objective is to maintain the integrity of the 15% SEZ rate while allowing normal group supply chains to operate. It is also worth noting that this type of change has been raised in policy and stakeholder conversations before, but this is the first time it has been explicitly signalled in budget-season materials. However, the question remains whether South Africa is willing to support and pursue a potential local transfer pricing regime this time.
Current law
Currently, section 12R(4)(c) remains in force as one of the qualification gates for the SEZ incentive. A company fails this gate if more than 20% of its deductible expenditure is incurred with, or more than 20% of its income is received from, connected persons who are South African residents, or from non-residents to the extent that the income or expenditure is attributable to a South African permanent establishment.
Failure of this test disqualifies the company from the 15% corporate income tax rate available to qualifying SEZ companies.
What the proposal means in practice (if enacted)
Replacing the cap with a market-related prices test would mean that higher related-party volumes would not, by themselves, jeopardise SEZ status, provided the pricing is demonstrably market-related. The arm’s-length principle is often applied as a proxy for market-related pricing.
With this in mind, the focus would shift from counting the percentage of related-party flows to evaluating transfer pricing methods, comparables and economic substance. This would align the SEZ rule with widely accepted transfer pricing principles. Practitioner commentary notes that this approach is intended to curb profit shifting while supporting legitimate investment and supply-chain activity within SEZs.
Timeline and next steps
The detailed design will follow the normal annual tax-bill process, including draft legislation and an Explanatory Memorandum for public comment. Until any amendment is formally enacted, section 12R(4)(c) continues to apply in its current form, and companies must continue to comply with the existing 20% cap.
Want to understand what the 2026 Budget means for your business?
Our tax specialists unpacked the key announcements and their practical implications for businesses operating in South Africa. For guidance on how the proposed changes may impact your business or group structure, contact BDO’s tax specialists. We can assist you in assessing the implications and ensuring your tax position remains aligned with current and proposed legislation.
What is changing?
Government has signalled a new approach to the Special Economic Zone (SEZ) cap for transactions with connected persons in section 12R(4)(c). Instead of applying the current threshold of “not more than 20% of income or deductible expenditure with connected South African persons (or with non-residents to the extent attributable to a South African permanent establishment)”, the proposal is to assess whether prices on sales to or purchases from connected parties outside the SEZ are market-related (arm’s length).
The stated objective is to maintain the integrity of the 15% SEZ rate while allowing normal group supply chains to operate. It is also worth noting that this type of change has been raised in policy and stakeholder conversations before, but this is the first time it has been explicitly signalled in budget-season materials. However, the question remains whether South Africa is willing to support and pursue a potential local transfer pricing regime this time.
Current law
Currently, section 12R(4)(c) remains in force as one of the qualification gates for the SEZ incentive. A company fails this gate if more than 20% of its deductible expenditure is incurred with, or more than 20% of its income is received from, connected persons who are South African residents, or from non-residents to the extent that the income or expenditure is attributable to a South African permanent establishment.
Failure of this test disqualifies the company from the 15% corporate income tax rate available to qualifying SEZ companies.
What the proposal means in practice (if enacted)
Replacing the cap with a market-related prices test would mean that higher related-party volumes would not, by themselves, jeopardise SEZ status, provided the pricing is demonstrably market-related. The arm’s-length principle is often applied as a proxy for market-related pricing.
With this in mind, the focus would shift from counting the percentage of related-party flows to evaluating transfer pricing methods, comparables and economic substance. This would align the SEZ rule with widely accepted transfer pricing principles. Practitioner commentary notes that this approach is intended to curb profit shifting while supporting legitimate investment and supply-chain activity within SEZs.
Timeline and next steps
The detailed design will follow the normal annual tax-bill process, including draft legislation and an Explanatory Memorandum for public comment. Until any amendment is formally enacted, section 12R(4)(c) continues to apply in its current form, and companies must continue to comply with the existing 20% cap.
Want to understand what the 2026 Budget means for your business?
Our tax specialists unpacked the key announcements and their practical implications for businesses operating in South Africa. For guidance on how the proposed changes may impact your business or group structure, contact BDO’s tax specialists. We can assist you in assessing the implications and ensuring your tax position remains aligned with current and proposed legislation.