Tax Advisers - Deloitte

South Africa
be in full-time employment in order for the business establishment exclusion to apply.
Following the amendments, however, not only does it appear that the CFC will now
need to have both on-site management and operational employees (arguably therefore
requiring at least two employees), but such employees will also be required to render
services on a full-time basis if the business establishment exclusion is to apply. These
requirements are found in the definition of a foreign business establishment, which
replaces the old business establishment definition.
Effectively, this means that two CFCs within the same multinational group will not be
able to share the services of a single employee, either directly or via an employment
company, in the event that their South African shareholder wishes to rely on the
business establishment exclusion. It goes without saying that the cost and
administrative burden of staffing each CFC with two or more full-time employees in
order to enable the business establishment exclusion to be relied upon, could act as a
deterrent for overseas expansion by South African multinationals and could make
South African multinationals uncompetitive when compared with their Australian, UK
or Canadian counterparts. Further, this amendment makes South Africa even more
unfavourable as an intermediary holding company jurisdiction, preventing the use of
South Africa for investments into the rest of Africa and elsewhere.
The legislature has, to an extent, recognized the negative implications of these
amendments. Therefore, other amendments have simultaneously been enacted which
provide for the commissioner to grant a ruling deeming that a business establishment
exists where two or more CFCs share employees, equipment and facilities. Taxpayers
wishing to take advantage of this new CFC ruling must do so in terms of the ATR
system (as discussed above). But there is a condition: a ruling will only be granted if
the CFCs are in the same country and form part of the same group of companies, the
latter requirement effectively necessitating a 70% or more common shareholding.
Consequently, for the business establishment exclusion to apply, two CFCs in different
countries would both be required to have full-time employees, as would two CFCs in
the same jurisdiction that do not form part of a group of companies. So while the new
CFC ruling limits the potential negative effect of the latest amendments, the
circumstances under which a ruling can be obtained are so restrictive that many South
African outbound multinational will no longer qualify for CFC exemption.
Conclusion
The new ruling procedures in South Africa have begun a new era in tax administration
and procedure. The possibility of more certainty regarding the interpretation of tax
statutes is a welcome development. Administrative execution of the procedures as well
as SARS and the courts adherence to Binding Private Rulings regarding the principle
of the rule of law will, however, ultimately determine their success.
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