South Africa Moves to Tighten VAT Rules for Special Economic Zones

South Africa's National Treasury has proposed changes to the country's tax laws to clarify how value-added tax (VAT) applies to businesses operating in Special Economic Zones (SEZs), aiming to close loopholes that could allow companies outside these zones to benefit from tax incentives.

The proposal, included in the Draft Taxation Laws Amendment Bill 2026, seeks to make it clear that the zero-rated VAT benefit applies only to services physically provided within an SEZ or a Customs-Controlled Area Enterprise.

Why the government wants to change the rules

Special Economic Zones are designated areas created to attract investment, increase exports, boost manufacturing, and create jobs by offering businesses various tax and customs incentives.

Under the current rules, uncertainty over whether services supplied to companies located inside an SEZ qualify for zero-rated VAT has created confusion. According to the National Treasury, this ambiguity has opened the door for businesses operating outside these zones to claim tax benefits that were never intended for them.

The proposed amendment is designed to ensure that only qualifying activities carried out within the designated areas receive the VAT incentive.

What businesses in SEZs receive

Companies operating in qualifying Special Economic Zones enjoy several incentives aimed at lowering the cost of doing business, including:

• A reduced corporate income tax rate of 15%, compared with the standard 27% rate.
• Zero-rated VAT on qualifying transactions.
• Employment-related tax incentives to encourage job creation.
• Import duty and VAT relief on certain raw materials and production equipment within customs-controlled areas.

These incentives are intended to encourage investment in industries that support exports, manufacturing, and industrial development.

South Africa currently has 13 Special Economic Zones located across the country, many of them positioned near major ports, airports, and transport corridors.

Some of the country's best-known SEZs include:

• Coega SEZ (Eastern Cape): Automotive manufacturing, logistics, renewable energy and industrial development.
• Richards Bay IDZ (KwaZulu-Natal): Mineral processing and export-focused industries.
• Saldanha Bay IDZ (Western Cape): Marine engineering, ship repair, oil and gas services.
• OR Tambo SEZ and Tshwane Automotive SEZ (Gauteng): High-value manufacturing, jewellery beneficiation, automotive production and air freight logistics.

The government has continued expanding the programme as part of its broader industrial development strategy and efforts to support the country's energy transition through local manufacturing.

Challenges remain despite incentives

While the tax incentives have helped attract local and foreign investment, they have not eliminated many of the challenges facing businesses in South Africa.

Companies continue to cite high operating costs, regulatory hurdles, electricity supply issues, port congestion, and weak municipal services as major obstacles to investment decisions.

Some analysts also argue that reducing the overall cost of doing business across the country not only within Special Economic Zonescould make South Africa more competitive and attract broader investment.

If approved, the proposed VAT changes would provide greater certainty for businesses while helping ensure that tax incentives are used only for their intended purpose. The clarification could also reduce opportunities for abuse and protect government tax revenue while maintaining support for investment in South Africa's strategic industrial zones.