For companies and professionals working on both sides of the Mohokare, the tax treaty between Pretoria and Maseru is one of the most important and most overlooked instruments shaping how profits, dividends, royalties and salaries are taxed. Here is what it does, and where it bites.
By Zurayda Mayet · Director, Mayet & Associates · Approx. 9 min read
Few businesses operating between South Africa and Lesotho ever read the Double Taxation Agreement (DTA) that governs their tax exposure, until a withholding tax assessment, a permanent establishment finding, or a dispute over which revenue authority gets to tax a profit forces them to. By then, the planning opportunities have usually closed.
The current treaty between the two governments was signed on 18 September 2014, entered into force on 27 May 2016, and applies generally from 26 June 2016. It replaced the earlier agreement that had governed cross-border tax since the late 1990s, modernising the rules to reflect capital gains tax, dividends tax and the realities of the South African investment that now flows through Lesotho’s construction, retail, transport, financial and mining sectors.
This guide walks through what the DTA actually does, focusing on the provisions that matter most to commercial clients trading, investing or deploying people across the border.
| THE TREATY AT A GLANCE Status In force from 27 May 2016; generally effective from 26 June 2016. Covers Residents of either or both states; taxes on income and certain gains. Method Double taxation relieved by the credit method in both countries. Caps Dividends 10%/15% · Interest 10% · Royalties 10% · Technical fees 7.5%. |
1.Who and what the treaty covers
The DTA applies to persons, individuals, companies and other taxable entities, who are residents of South Africa, Lesotho, or both. On the South African side it reaches normal tax, the dividends tax, the withholding taxes on interest and royalties, and the tax on foreign entertainers and sportspersons. On the Lesotho side it applies to taxes under the Income Tax Act, 1993. Crucially, it also extends to any substantially similar taxes introduced later, so the framework does not lapse every time a rate or a label changes.
2. Residence and the tie-breaker that can leave you with nothing
Everything in the treaty turns on residence. Where an individual is treated as resident in both countries, a familiar cascade decides the matter: permanent home, then centre of vital interests, then habitual abode, then nationality, and finally mutual agreement between the two revenue authorities.
The trap sits with companies. Where a company is resident in both states, the treaty does not default to place of effective management. Instead, the two competent authorities must agree where it is resident and if they cannot agree, the company is denied treaty relief altogether. For groups structured across the border, dual residence is therefore not a neutral position; it is a live risk that should be designed out, not discovered later.
| Practical point: A Lesotho-incorporated company managed from South Africa (or vice versa) can fall into the dual-residence gap. Confirm a single, defensible residence position before relying on any reduced rate in this treaty. |
3.Permanent establishment and the thresholds that catch operators
A business is generally taxed only in its home state unless it has a “permanent establishment” (PE) in the other. The DTA sets out the usual list, a place of management, branch, office, factory, workshop or extraction site but the provisions that actually catch cross-border contractors and consultants are the time thresholds:
- A building site, or a construction, assembly or installation project (including related supervision) creates a PE only if it runs for more than six months.
- The furnishing of services, including consultancy, through employees or engaged personnel creates a PE where that activity continues for more than 90 days in any twelve-month period for the same or a connected project.
- Independent professional services performed by an individual likewise create a PE once they exceed 90 days in any twelve-month period.
An agent who habitually concludes contracts in the name of an enterprise can also constitute a PE. Purely preparatory or auxiliary activities, storage, display, purchasing, information-gathering, do not. For service businesses in particular, the 90-day services rule is the line most often crossed without anyone noticing.
The 90-day services threshold is the provision most cross-border consultancies breach first and the one their contracts most often ignore.
4.Withholding taxes and the rates that matter
For most clients, the commercial heart of the treaty is the ceiling it places on withholding taxes in the source country. These are caps: where domestic law (or a more favourable rule) gives a lower rate, the lower rate applies.
Maximum source-state tax under the SA–Lesotho DTA
| Type of payment | Cap | Condition |
| Dividends | 10% | Beneficial owner is a company holding at least 10% of the payer’s capital |
| Dividends | 15% | All other cases |
| Interest | 10% | Beneficial owner resident in the other state |
| Royalties | 10% | Beneficial owner resident in the other state |
| Technical fees | 7.5% | Technical, managerial or consultancy services |
| Branch profits tax | 10% | On repatriated income of a branch of the other state’s company |
Two features deserve emphasis. First, the treaty contains a distinct technical fees article, capped at 7.5%, covering payments for technical, managerial or consultancy services. Many businesses mischaracterise these as ordinary business profits or royalties and either over-withhold or under-withhold as a result. Second, a most-favoured-nation clause in the Protocol provides that if Lesotho later agrees a lower rate on interest, royalties or technical fees with any other country, that lower rate flows through to this treaty.
5.Capital gains, including “land-rich” shares
Gains on immovable property are taxable where the property sits. The treaty extends this to indirect holdings: gains on the disposal of shares that derive more than 50% of their value from immovable property in the other state may be taxed in that other state. A share sale structured to sidestep transfer duty or local gains tax will not necessarily escape the source country’s reach where the underlying value is land or buildings.
6.Employment and the 182-day rule
Salaries are taxable where the work is done. But under the short-stay exemption, an employee remains taxable only in their home state where all three conditions are met: presence in the other state of not more than 182 days in any twelve-month period; remuneration paid by an employer who is not resident in the host state; and the cost not borne by a PE in the host state. Secondments, project staff and cross-border directors should be tracked against these conditions from day one. Directors’ fees, by contrast, may be taxed in the state where the company is resident.
7.Relieving double taxation and the carve-outs
Both countries use the credit method: tax paid in one state is credited against tax due in the other, subject to domestic limits. The treaty also preserves a tax-sparing credit, so incentives granted under approved economic-development schemes are not clawed back by the other state. That benefit is deliberately fenced, however, the Protocol excludes financial intermediation (banking and insurance), the licensing of intellectual property, shell companies without substantive operations, and passive income. The sparing credit rewards genuine economic activity, not treaty-shopping.
8.Cooperation and anti-avoidance
The modern provisions are not window-dressing. The two revenue authorities exchange information that is foreseeably relevant to enforcing their tax law, including information held by banks and other financial institutions and they assist each other in the collection of tax debts, so a liability in one country can be enforced through the other. A mutual agreement procedure gives taxpayers a route to challenge taxation contrary to the treaty, provided the case is presented within three years of the first notification of the offending assessment.
| Bottom line: The treaty reduces double taxation, but it also tightens cooperation between SARS and the Lesotho Revenue Authority. Aggressive structuring is materially riskier under this agreement than under its predecessor. |
9.What this means for your business
- Fix your residence position. Dual-resident companies risk losing treaty relief entirely. Establish and document a single residence before transacting.
- Watch the PE clock. Six months for construction, 90 days for services, build these thresholds into contracts, mobilisation plans and pricing.
- Classify payments correctly. Dividends, interest, royalties and technical fees each carry their own cap. Misclassification means over- or under-withholding, and exposure on both.
- Track people across the border. The 182-day test is failed quietly. Keep day-count records for every seconded or travelling employee.
- Don’t assume the old position still holds. The current treaty differs in important respects from its predecessor, and the cooperation provisions are far stronger.
| Advising on both sides of the border Mayet & Associates is a dual-jurisdiction commercial law firm admitted before the Legal Practice Council in the Free State and the Law Society of Lesotho. We advise companies, investors and professionals on cross-border structuring, withholding tax exposure, permanent establishment risk and treaty relief between South Africa and Lesotho. Speak to our cross-border team → SOUTH AFRICA 14 Louw Wepener Street, Dan Pienaar, Bloemfontein LESOTHO 20 Motsoene Road, Anwary Building, Maseru 100 |
This article is provided for general information only and does not constitute legal or tax advice, nor does it create an attorney–client relationship. Tax treaty outcomes depend on the specific facts, the residence and characterisation of the parties, and the domestic law of each jurisdiction as it stands from time to time. The treaty rates referred to are maximum source-state caps and may be reduced by domestic law or subsequent agreement. Readers should obtain tailored advice before acting. © 2026 Mayet & Associates Inc. All rights reserved.