A corporate income tax rate of 15%, compared with the normal rate of 27%, is an attractive proposition for any business considering a substantial investment in South Africa.

Add accelerated tax allowances for qualifying buildings, and the financial benefits of operating within a Special Economic Zone (SEZ) become even more compelling.

But there is a catch. Simply setting up business in an SEZ does not guarantee access to these incentives.

This is one of the important messages emerging from SARS' recently published Guide to Income Tax Benefits in Special Economic Zones. The 64-page guide explains the conditions businesses must satisfy to enjoy the tax benefits and, perhaps more importantly, the circumstances in which they may lose them.

Not all zones are created equal

South Africa has established several SEZs to encourage investment, industrial development and employment. However, not every designated zone has received the additional approval necessary for businesses operating there to qualify for the income tax incentives.

Even within an approved zone, the business itself must meet certain requirements.

For example, at least 90% of its income from trading activities must be generated within one or more approved SEZs. A company cannot simply establish a registered office or warehouse within a zone while conducting most of its business elsewhere.

This becomes particularly important where businesses operate from several locations. A manufacturer might have a substantial factory within an SEZ but also conduct other income-producing activities outside the zone. Depending on the circumstances, those activities could put the preferential tax rate at risk.

And qualifying once is not enough. The requirements must be satisfied from year to year.

Moving your business may not be enough

The incentives were introduced to attract new investment and encourage industrial expansion, not simply to reward existing businesses for changing their addresses.

An established manufacturer cannot necessarily relocate its existing operations into an SEZ and expect its tax rate to fall from 27% to 15%.

However, the position may be different where the relocation involves the production of new goods, the introduction of new technology or an increase in production capacity.

The distinction is important. A business contemplating relocation should establish whether its proposed investment genuinely satisfies the requirements before committing substantial capital.

The activities you undertake also matter

Not every business activity qualifies for the incentives.

Certain industries are specifically excluded, while others may lose the benefit because they conduct activities that fall outside the permitted categories.

Interestingly, SARS recognises that some activities, although technically falling within an excluded category, may simply be incidental to a qualifying manufacturing operation.

For example, a manufacturer packaging its own products would not necessarily lose the incentive merely because packaging is an excluded activity. However, if that same manufacturer starts providing packaging services to other businesses as a separate income-producing activity, the position may change.

The distinction between activities supporting a manufacturing operation and those constituting a separate business can therefore become critical.

When doing business with your own group becomes a problem

Perhaps the most commercially significant restriction concerns transactions between companies within the same group.

Modern businesses seldom operate in isolation. Manufacturing, procurement, distribution and administration are frequently undertaken by separate companies within a corporate group.

Yet the current rules can deny an SEZ company the preferential tax rate where more than 20% of its deductible expenditure or income arises from certain transactions with connected companies.

Consider a manufacturer operating within an SEZ that purchases a substantial portion of its raw materials from another South African company in the same group. Even where those purchases take place at ordinary market prices, exceeding the prescribed threshold could result in the manufacturer losing its entire tax incentive.

That is a potentially harsh consequence for what may be an entirely sensible commercial arrangement.

A welcome change on the horizon?

Fortunately, National Treasury has recognised this difficulty.

The 2026 Draft Taxation Laws Amendment Bill proposes replacing the rigid 20% limitation with a domestic transfer pricing regime.

Instead of disqualifying a company merely because it conducts substantial business with related parties, the proposed approach would examine whether those transactions take place on terms that independent businesses would ordinarily agree.

Where prices are manipulated to obtain a tax advantage, an adjustment could be made to the taxable income concerned.

This would represent a more commercially realistic approach, recognising that transactions between related companies are not inherently objectionable. The concern should be whether profits are artificially shifted to take advantage of the lower tax rate.

The proposal remains subject to the legislative process, and businesses must continue to comply with the existing requirements until the law changes.

An opportunity with an expiry date

There is also a longer-term consideration. The preferential 15% tax rate is currently scheduled to cease applying to years of assessment commencing on or after 1 January 2031.

For businesses contemplating major capital investments, this is particularly relevant. The timing of construction, commencement of operations and anticipated profitability could materially influence the value of the incentive.

SEZs undoubtedly offer attractive opportunities for businesses investing in South Africa. However, SARS' latest guide serves as a useful reminder that the tax benefits depend not simply on where a business operates, but on what it does, how it operates and with whom it transacts.

For prospective investors, understanding these distinctions before committing capital could make a substantial difference to the eventual return on their investment.