The minister of Finance raised a concern that the current Controlled Foreign Company (“CFC”) rules do not include foreign companies held by interposed trusts or foundations.
South Africa force taxes on worldwide income of South African residents. The Income Tax Act contains anti-avoidance provisions. An example of one of these provisions was the introduction of CFC provisions contained in section 9D of the Income Tax Act.
The rules of the CFC are implemented to prevent South Africans to shift income offshore by investing in a CFC.
A CFC is a foreign company of which 50% of the shares are held by South African tax residents. An amount equal to the net income of the CFC will be included in the South African resident’s income in the proportion of such resident’s participation rights to the total participation rights in the CFC. A typical example of an exemption will be where the CFC has actual operations in the foreign country for instance offices and staff, or if the taxes levied in the other country comprise at least 75% of the taxes that would have been levied had the company been a tax resident in South Africa.
Previously, South African tax residents made use of a non-resident discretionary trust through which to hold interest in companies owned offshore. Thus, those companies were not drawn into the CFC regime since they were not owned by South African tax paying residents.
The latest draft Taxation Laws Amendment Bill, will target these offshore trust structures, and it is proposed to expand the definition and the rules of a CFC to include not only as above but also companies held by non-resident trusts of which South Africa tax residents are beneficiaries. The inclusion of section 25BC will go one step further and will target any distribution received by a resident, other than a company from certain foreign trusts or foundations. The amendments to section 9D of the Bill, also deals with international groups being consolidated in South Africa in terms of International Financial Reporting Standards (“IFRS”) 10. This means that if you have a foreign company forming part of a group, and that company should be consolidated for IFRS reporting purposes, then such a company will be viewed as a CFC for South African tax purposes.
It also means that if a South African resident is a beneficiary of a foreign trust and that trusts owns a company and that company would have been considered a CFC, had that trust not been in place, then the distribution received from that trust would be deemed ordinary income in the hands of the resident beneficiary when distributed.
The proposed amendments were supposed to come into effect on the 1st of January 2018 but due to the complexity of the rules and the inclusion of section 25BC that poses the possibility for double taxation or taxation of residents that would normally fall outside the scope of the CFC rules, it has been postponed to a later stage.