We have previously reported on the “controlled foreign company” (“CFC”) regime as contained in section 9D of the Income Tax Act, 58 of 1962. Briefly again, that section seeks to impute the taxable income of a CFC into the hands of its South African tax resident shareholder. A CFC is in essence a foreign company of which more than 50% of the shares are held by South African tax residents. Typical exemptions though will be where the CFC has actual operations in the foreign country comprising offices, staff, etc. (a so-called “foreign business establishment”), or if the taxes levied in the other country comprise at least 75% of the taxes that would have been levied had that company been a tax resident in South Africa. At its core therefore the CFC regime seeks to ensure that companies set up in low-tax jurisdictions by South African tax residents will still give rise to income tax for its South African shareholders: the CFC’s taxable income (calculated as though those companies themselves are also South African tax resident) is imputed into the hands of its South African shareholders.
Up to now, South African tax residents could make use of non-resident discretionary trusts through which to hold interest in companies owned offshore and in low-tax jurisdictions. Therefore, those companies were not drawn into the CFC regime since they were not owned by South African tax residents. Even though such an offshore trust (holding the implicated companies) had only South African tax residents as discretionary beneficiaries, legally the beneficiaries had no entitlement to any of the income or voting rights in the underlying companies.
The newly published draft Taxation Laws Amendment Bill seeks to target these offshore trust structures, and it proposes to expand the definition of a CFC to also include companies held by non-resident trusts of which South African tax residents are beneficiaries. In other words, these offshore trust structures will no longer be capable of shielding South African tax residents against the consequences of the CFC regime.
The draft legislation is proposed to come into effect on 1 January 2018, if enacted in its current form. It is not entirely clear from the current proposals though how an attribution of taxable income will be made practically. For example, if a foreign trust has as its discretionary beneficiaries an open-ended list such as any company or trust in which X, Y or Z may have a beneficial interest, how does one go about allocating the taxable income of the controlled foreign companies to such a potentially innumerable list of beneficiaries? The problem is compounded when some of the beneficiaries are actually non-tax resident too. We expect these and further refinements to be made to the draft Bill once the final Bill is published later this year.
This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your financial adviser for specific and detailed advice. Errors and omissions excepted (E&OE)