Participation Exemption Refined
13 November 2013
Posted by: Author: Webber Wentzel
Author: Webber Wentzel
Refinement of participation exemption in respect of foreign dividends
The TLAB has introduced a change to the foreign dividend exemption ("the participation exemption") contained in section 10B. Currently, the participation exemption applies to foreign dividends which are received by a person (whether alone, or together with another company forming part of the same of companies) who holds at least 10% of the total equity shares and voting rights in the company declaring the foreign dividend. This may be interpreted as applying to all dividends (e.g. including preference share dividends) declared by a foreign company to a shareholder, provided the shareholder holds the requisite voting rights and equity shares. However, this was apparently not intended by the legislature, and accordingly wording has been introduced to clarify that only foreign dividends which are received in respect of equity shares, will be exempt.
The amendment will apply to foreign dividends which are received or accrued on or after 1 April 2014. The effective date in the previous version of the TLAB was 1 January 2014, but this has been moved out to allow taxpayers time to restructure their participations to equity share participations.
The TLAB has also added a new subsection (6) to section 10B which will come into operation on 1 March 2014 and apply in respect of foreign dividends received or accrued after that date. It provides that the foreign dividend exemption provisions will not apply to any foreign dividend received by or accrued to a person in respect of services rendered, or by virtue of employment or the holding of any office, other than a foreign dividend received or accrued in respect of a restricted equity instrument as defined in section 8C held by that person or in respect of a share held by that person. This mirrors the amendment which has been proposed to section 10(1)(k)(ii) which exempts certain local dividends.
CFC and working capital exemption
In terms of the current CFC rules, passive income is excluded from the foreign business establishment exemption unless the amount is derived by a bank, financial services provider or insurer or if the amount falls within the so-called working capital exclusion. The working capital exclusion applies if the total amount of passive income does not exceed 5% of the total income of that CFC. In terms of the proposed changes to the CFC rules, the working capital exemption will not apply where the passive receipts and accruals are generated by a treasury operation or captive insurer. Unfortunately, this proposed change could give rise to uncertainty due to the wide meaning that can be attributed to a "treasury operation" or "captive insurer". The proposed amendment will be effective for years of assessment commencing on or after 1 April 2014.
Ring-fenced net foreign trade losses
In terms of current law, foreign assessed losses cannot be offset against income derived from carrying on a South African "trade". The TLAB now amends the wording of section 20(1) to expressly forbid the setting-off of net foreign losses against any South African sourced income, thereby covering both domestic trading as well as passive income.This amendment is effective in respect of any year of assessment commencing on or after 1 January 2014.
Transfer pricing relief for equity loans
Transfer pricing relief will be extended to outbound equity loans made to offshore entities by any South African resident creditor that holds at least 10% of the equity shares and voting rights in the offshore debtor, provided that the loan is perpetual or not redeemable within a period of 30 years from the date the loan is granted and the full redemption of the debt must be conditional on the market value of the assets of the foreign company not being less than the value of the liabilities of the foreign company.
This amendment is effective in respect of any year of assessment commencing on or after 1 April 2014.
Exchange of shares as a means of corporate migration
This amendment classifies the issue of shares by a South African resident company as a disposal for CGT purposes where such shares are issued in exchange (whether directly or indirectly) for shares in a non-resident company. The proceeds from such disposal are deemed, in terms of paragraph 35 of the CGT Schedule, to equal the market value of the foreign shares being acquired.Notably the deemed proceeds provision in Paragraph 35 only applies form 1 January 2014 whereas the amendment to paragraph 11(2)(b) comes into operation on 1 April 2014 and will only apply in respect of shares issued on or after this date.
This article was first published on webberwentzel.co.za