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South Africa Update continued
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a benefit from its activities. This is a facts and
circumstances case. Factors such as control over the
distribution and reinvestment policies, annual business
plans, corporate strategy, capital expenditure, raising
finance, winding up of the entity, voting rights or the
power to appoint or remove the board of directors will
be taken into account on a case-by-case basis. This
concept is derived from financial accounting principles.
The ownership thresholds in respect of the dividend and
capital gain participation exemptions in relation to foreign
shares will be reduced from 20% to 10%. This lower
threshold is consistent with the global economic
concept of direct foreign investment.
The proposed amendments will apply to the net income
of a controlled foreign company relating to the year of
assessment beginning on or after 1 April 2012.
CFC restructurings
In terms of existing law, South African resident companies
can restructure their affairs through various transactions
falling within the so-called reorganisation rollover rules.
In terms of these rules, the transactions themselves are
from tax but any gain is deferred until a later disposal.
The rollover rules apply to asset-for-share transactions,
amalgamations, intra-group transfers, unbundlings and
liquidations. These relief measures are not currently
available to the restructuring of foreign operations (except
in very limited circumstances).
In respect of offshore restructurings, only a capital gains
participation exemption currently applies. Under the
participation exemption, the gain is wholly exempt when
residents and CFCs dispose of equity shares in a 20% held
foreign company. However, the exemption only applies if the
foreign shares are transferred to a totally independent foreign
resident or to a CFC under the same South African group of
companies. The restructuring of CFC assets can also qualify
for tax relief if disposed of within the confines of the foreign
business establishment exemption or if the disposal occurs
within a high-taxed country.
In light of the global economic crisis, many South African
multinationals are seeking to restructure their offshore
operations. The current participation exemption applicable
to offshore restructurings is too narrow resulting in certain
restructurings being excluded. In view of the above, the
domestic corporate restructuring rollover rules will be
extended to fully include the restructuring of offshore
companies that remain under the control of the same
South African group of companies.
As a result of the extended deferral regime, participation
exemption for transfers to CFCs will accordingly be deleted
in order to remove the possibility of avoidance.
These proposed amendments will apply in respect of
transactions entered into on or after 1 January 2012.
Offshore cell companies
Control of a foreign company generally exists if South
African residents own more than 50% of the participation
and voting rights of the foreign company. Currently, the CFC
rules do not apply to foreign statutory cell companies (often
referred to as “protected cell companies” or “segregated
account companies”). These companies effectively operate
as multiple limited liability companies, separated into legally
distinct cells. These cell companies are often found in the
jurisdictions of Bermuda, Guernsey, Gibraltar, Isle of Man,
Jersey, Vermont, Mauritius and Seychelles.
It is proposed that the CFC rules be adjusted so that each
cell of a foreign statutory cell company will be treated as a
separate stand-alone foreign company for all South African
CFC regime purposes. Therefore, if one or more South
African residents hold more than 50% of the participation
rights in an offshore cell, the cell will be deemed to be a
CFC without regard to ownership in the other cells. CFC
treatment for the cell will thus trigger indirect tax for the
participant cell owners to the extent the cell generates
tainted income.
The proposed amendment will apply in respect of foreign
tax years of a CFC ending during years of assessment
commencing on or after 1 January 2012.
Unification of source rules
South African residents are taxed on the basis of their
world-wide income with foreign sourced income eligible for
tax rebates (credits) in respect of foreign tax proven to be
payable. Non-residents are only subject to tax on the basis
of income derived from sources within (or deemed to be
within) South Africa.
The Income Tax Act does not comprehensively define the
term “source”. The source of income is instead initially
40 // PKF International Tax Alert All Regions
Issue 8 November 2011