On 14 March 2025, the South African National Treasury issued amendments to 2019 regulations for the purposes of defining "electronic services" under section 1 of the Value-Added Tax (VAT) Act. These amendments to the electronic services regulation are crucial in determining whether foreign suppliers of electronic services must register for and levy VAT. The amendments become effective on 1 April 2025, and encompass the following changes:

• Revise the definition of "electronic services" to exclude supplies made by foreign nonresidents who supply exclusively to VAT registered vendors
• Amend the intermediary rules allow nonresidents to utilize an intermediary as principal for electronic services purposes, irrespective of their VAT-registration status or liability
• Introduce a more restrictive exclusion for intragroup supplies where services consumed by the local group entity must also be devised, developed, created or produced specifically for consumption by the local resident entity

Amendment to definition of electronic services

Considerations for foreign electronic service providers

Previously, any electronic service supplied to a South African customer, irrespective of the type of the customer or its VAT-registration status, was considered an "electronic service," as defined, and required the foreign nonresident to register for VAT if the threshold was met.

The new regulation now provides that where a nonresident entity supplies electronic services solely to South African VAT-registered vendors, that nonresident would not be supplying "electronic services" as defined. As a result, nonresidents that solely supply electronic services to VAT-registered vendors in South Africa are no longer considered to be operating an enterprise in South Africa and will need to deregister.

However, if a nonresident supplies electronic services to both VAT-registered and non-VAT-registered customers, the supplier must still account for VAT on all supplies made to customers, irrespective of the customers' VAT status in South Africa. In this situation, all supplies must be considered when determining whether the nonresident has exceeded the registration threshold of 1,000,000 South African Rand (ZAR1m) within a consecutive 12-month period.

The onus will remain on the foreign entity to prove that its customers are South African VAT-registered vendors. Businesses that would normally not be VAT-registered entities can include government entities, financial service providers, small enterprises and educational services providers. The foreign electronic service provider should therefore carefully consider whether its clients meet the exemption.

The amendment aims to reduce the administrative burden on suppliers and recipients, particularly when the fiscal authority gains little or no benefit to levying the additional VAT. The change aligns, to a limited extent, with Organisation for Economic Co-operation and Development's recommendations and simplifies the VAT processes for nonresident suppliers that lack a physical presence in South Africa. It is critical to note that not all business-to-business transactions are excluded, however.

Considerations for South African recipients of supplies from foreign electronic services suppliers

A South African person who acquires electronic services from foreign suppliers must now confirm whether the service provider levied VAT on the customer and further assess whether the customer will be required to declare VAT on imported services.

Intermediaries

Recent changes made in South Africa's VAT legislation have broadened the scope of the use of intermediaries. Previously, an electronic service provider could only use an intermediary if it was not VAT registered (or not required to be registered) in South Africa.

Currently, electronic service providers may use an intermediary even if it is VAT registered. Any supplies made by that intermediary, on behalf of the principal, would be deemed to be made by the intermediary. In this context, the principal and the intermediary would be jointly and severally liable for any supplies deemed to be made by the intermediary. In this case, the principal and intermediary must agree in writing that the supply will be regarded as that of the intermediary.

The policy rationale for this approach is to alleviate the administrative burden on the principal, ensure that VAT is not accounted for twice (by both the principal and the intermediary) for the same supply, and facilitate easier compliance checks and audits.

VAT-registered vendors that could not previously use the intermediary rules may now consider using these rules and may potentially deregister for VAT.

Intergroup supplies

The intergroup exclusion applies where a nonresident company and a resident company form part of the same group of companies. Under the 2019 regulation, intergroup relief was applicable to electronic services supplied exclusively for consumption by the South African group entity.

In addition to the shareholding requirement from the 2019 regulation, the new regulation requires the nonresident company providing the electronic services to have specifically devised, developed, created or produced the electronic services for use by the local group entity.

Foreign companies making use of the intergroup exclusion must therefore reassess their intergroup supplies under the new rules.