Special economic zones in South Africa

South Africa’s Special Economic Zone (“SEZ”) regime has long been positioned as a catalyst for industrial growth, foreign direct investment and export competitiveness. The regime offers qualifying companies a preferential 15% corporate income tax rate, accelerated building allowances and other incentives aimed at attracting foreign direct investment. In the 2026 Budget Speech, National Treasury signaled renewed commitment to strengthening and refining the SEZ framework, not merely as an incentive regime, but as a strategic lever aligned to industrial policy, infrastructure development and global tax reform.

For multinational groups operating in South Africa, or considering expansion into SEZs, the developments raise important questions, particularly in the context of transfer pricing governance and the evolving global minimum tax landscape. 

The SEZ Tax Regime refresher 

South Africa’s SEZ regime, governed primarily by section 12R of the Income Tax Act 58 of 1962, provides that companies operating within designated SEZs may benefit from a reduced corporate income tax rate of 15% (subject to qualifying criteria); accelerated depreciation allowances; and customs and value added tax (“VAT”) relief measures in certain cases. 

These incentives were designed to attract manufacturing and export-focused businesses, create employment and stimulate regional development. However, these incentives have always been accompanied by anti‑avoidance measures designed to prevent artificial profit-shifting into SEZs. One of the most significant of these is section 12R(4)(c), which disqualifies a company from the SEZ tax incentive if more than 20% of its income or deductible expenditure arises from transactions with connected persons.  

While conceptually simple, the provision has produced several practical challenges: 

It applies irrespective of whether transactions are priced at arm’s length, meaning fully compliant transfer pricing arrangements may still result in disqualification. 

It discourages vertical integration and group supply chains, particularly where multinational groups wish to locate manufacturing or processing activities within SEZs while sourcing inputs or services from related entities. 

It creates volatility and uncertainty, as minor fluctuations in intragroup volumes can trigger the loss of the incentive. 

As a result, section 12R(4)(c) has often been criticised for prioritising formal thresholds over economic substance. 

In a post-BEPS world, and particularly with the advent of global minimum tax rules, preferential tax rates cannot be viewed in isolation. 

Budget 2026: Taxation Proposal 

The 2026 Budget Speech reaffirmed government’s intention to improve efficiency and effectiveness of the SEZ incentive regime. The 2026 Budget Speech marks a notable policy inflection point, with National Treasury proposing to move away from rigid transactional thresholds towards a market‑value, arm’s‑length‑based approach, more closely aligned with South Africa’s transfer pricing framework under section 31. 

While no immediate legislative overhaul was announced, the clear policy direction is that SEZ incentives must deliver measurable economic value and withstand international tax scrutiny. The tone suggests a move away from purely tax-driven incentives toward substance-driven investment promotion. 

What this means for Transfer Pricing 

If implemented, the SEZ entities benefiting from a 15% corporate tax rate would need to demonstrate genuine economic activity. From a transfer pricing perspective, this elevates the importance of functional delineation, operational substance, and where relevant, the alignment of DEMPE-related activities with intellectual property returns. 

Where an SEZ entity is positioned as a principal or entrepreneur within a multinational group, its profit allocation must withstand scrutiny under the arm’s length principle as articulated by the OECD Guidelines. 

Increased policy focus on SEZ effectiveness may translate into heightened review of whether SEZ entities are appropriately remunerated relative to their functions and risks. 

Risk of Misalignment 

Where multinational groups establish SEZ entities primarily for rate arbitrage, without corresponding operational substance, several risks arise: 

• Transfer pricing adjustments; 
• Denial of incentive benefits; 
• Reputational exposure; and 
• Increased audit scrutiny. 

With revenue authorities globally intensifying enforcement activity, SEZ structures must be defensible from both a domestic and international perspective. 

The Pillar II Overlay: The Global Minimum Tax Effect 

For multinational groups within the scope of Pillar II, the interaction between SEZ incentives and the global minimum tax introduces an additional layer of complexity. Although an SEZ entity may benefit from a 15% statutory tax rate, its effective tax rate (“ETR”) for Pillar II purposes is calculated differently. Certain incentives and timing differences may reduce the GloBE ETR below 15%, potentially triggering a top‑up tax under an Income Inclusion Rule or an Undertaxed Profits Rule in another jurisdiction. 

This raises a critical question: Are SEZ incentives still economically beneficial once Pillar II is factored in? 

In some cases, the domestic benefit may be partially or fully neutralised by a top‑up tax, whether collected in South Africa under a domestic minimum tax or, in certain circumstances, under an Income Inclusion Rule or Undertaxed Profit Rule in another jurisdiction.  

Accordingly, SEZ planning can no longer be limited to domestic tax modelling. It requires group‑level modelling to determine whether the incentive is retained, diluted or entirely offset. 

Conclusion 

The 2026 Budget proposal to move towards a market‑value‑based test represents a meaningful evolution, aligning SEZ policy with modern transfer pricing principles and international best practice. 

For taxpayers, SEZ incentives will increasingly depend on substance, pricing integrity and defensible transfer pricing outcomes, rather than mechanical compliance with transaction thresholds. For policymakers, the reform offers a pathway to enhance investment attractiveness while maintaining fiscal discipline, which is an essential balance in South Africa’s current economic landscape. 

Authors

 Charl Hall, Nadine Smit, Kiara Chetty